U.K. Inflation Slows to 2.2%, Lowest Level in a Year

U.K. inflation slowed more than economists forecast in October and is now the closest it’s been to the Bank of England’s 2 percent target since September 2012.

Consumer prices rose 2.2 percent from a year earlier compared with 2.7 percent the previous month, the Office for National Statistics said today in London. The median forecast of 34 economists in a Bloomberg News survey was for a reading of 2.5 percent. Core inflation slowed to 1.7 percent, the least since September 2009.

The bank’s new quarterly forecasts to be published tomorrow will indicate whether faster growth has prompted officials to revise their view that the key interest rate can stay at a record low until late 2016. While deflation risks prompted the European Central Bank to ease policy last week, in the U.K. the prospect of a pickup in prices weigh against such a move.

“The inflation figures are helpful but they’re not by any stretch suggesting that we need to embark on another round of policy easing,” said Rob Carnell, chief international economist at ING Bank NV in London. “The inflation picture is much worse here than it is in Europe. Today’s report may be just a flash in the pan.”

The pound extended its decline against the dollar after the data were released and was trading at $1.5887 as of 11:21 a.m. London time, down 0.6 percent on the day. The yield on the benchmark 10-year U.K. government bond fell 3 basis points to 2.78 percent.

Core Inflation

The largest downward effect on the 12-month inflation rate in October was from transport costs, including motor fuels and air fares, as well as university tuition fees, the statistics office said. From the previous month, consumer prices rose 0.1 percent in October, less than the median forecast for a 0.3 percent gain.

There may be upward pressure on inflation as Britain’s largest energy suppliers put up their prices by about 10 percent within the next two months.

Core annual inflation, which excludes alcohol, food, tobacco and energy prices, slowed from 2.2 percent in September. Economists had forecast that it would ease to 2 percent.

Retail-price inflation, a measure used in wage negotiations and as a basis for the inflation-linked bond market, cooled to 2.6 percent in October from 3.2 percent in September, the lowest since September 2012. Retail prices excluding mortgage-interest payments rose an annual 2.7 percent, down from 3.2 percent.

BOE Policy

The BOE kept its benchmark rate at 0.5 percent last week and held its target for bond purchases at 375 billion pounds ($598 billion).

Under Governor Mark Carney’s forward-guidance policy, the bank has pledged to not to withdraw stimulus at least until unemployment falls to 7 percent. It projected in August that threshold won’t be reached until the end of 2016. Carney will present new projections at a press conference tomorrow.

The bank’s new guidance framework is subject to caveats linked to above-target price increases. Today’s report eases the risks that officials will have to cancel guidance because of concerns about inflation.

Today’s data “will provide a fillip to heavily squeezed households and help the Bank of England maintain ultra-loose monetary policy to support the recovery,” said Rob Wood, an economist at Berenberg Bank in London and a former BOE official. “We do not expect rapid consumer price rises to deal the knockout blow to the Bank of England’s forward guidance.”

Deflation Concerns

The ECB unexpectedly cut its benchmark interest rate to a record low on Nov. 7 to prevent slowing inflation from getting entrenched as the economy struggles to recover. The Frankfurt-based bank halved its refinancing rate to 0.25 percent in a move anticipated by three of 70 economists in a Bloomberg survey.

Euro-area inflation slowed in October to 0.7 percent, below the ECB’s goal of “close to but below” 2 percent, sparking fears of a deflationary cycle.

Inflation in Germany, Europe’s largest economy, slowed to 1.2 percent in October from a year earlier, compared to 1.4 percent in September, the country’s statistics office said today.

In the U.K., separate data from the statistics office today showed factory output prices fell 0.3 percent in October from September, the biggest decline since June 2012. From a year earlier, prices rose 0.8 percent, the smallest annual increase since October 2009. Input costs fell 0.6 percent in October on the month and were down 0.3 percent from a year earlier.

In another report, the ONS said U.K. house prices increased 3.8 percent in September from a year earlier. In London, prices increased 9.4 percent.

A U.K. house-price index rose to the highest in more than a decade in October as government programs to boost homeownership increased the pressure on supply, the Royal Institution of Chartered Surveyors said in a report today.

The gauge increased to 57, the highest since June 2002, from a revised 32 in September. House prices are expected to continue rising in all regions except northern England and sales expectations climbed to the highest on record, RICS said.

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