U.K. Inflation Slows to Match 5-Year Low on Food Prices

The U.K. inflation rate fell to match the lowest in five years in August as a supermarket price war and weather effects pushed food prices down the most in more than a decade.

The rate of consumer-price growth fell to 1.5 percent from 1.6 percent in July, in line with the median forecast of economists and marking an eighth month below the Bank of England’s 2 percent target. Food and non-alcoholic drinks dropped an annual 1.1 percent, the most since 2003.

While inflation is now back to its lowest reading in five years, consumers are still feeling the pinch of a recovery that hasn’t given a fillip to earnings. They will have to wait until the second quarter of next year before a squeeze on their living standards starts to properly ease, according to a Bloomberg survey of economists published today.

With the U.K. poised for the fastest growth in the Group of Seven this year, BOE Governor Mark Carney has put weak pay at the center of the case for keeping rates at a record low. While two of the central bank’s nine policy makers voted to increase the benchmark rate from 0.5 percent in August, Carney was among the majority who said such a move wasn’t yet warranted.

Inflation below target “definitely gives them wiggle room,” said Mike Amey, a money manager at Pacific Investment Management. Still, a “few inflation numbers below target is good news, but I don’t think it’s the all clear to leave rates on hold. Generally, the route for rates is still higher. It’s a question of when rather than if.”

Unemployment Data

Data tomorrow will probably show the unemployment rate fell in the three months through July. Economists also forecast that wages rose an annual 0.5 percent in the period.

Asked when will wage growth begin to outpace inflation on a sustainable basis, 74 percent of 34 analysts in the Bloomberg survey said the three months through June or later.

The stronger labor market is “not yet feeding through to wages but it can’t be long, so real wages will probably start to grow in the first half of next year,” said Rob Wood, an economist at Berenberg Bank in London. “It’s going to be a very gradual process.”

Inflation has now been below the BOE’s goal for the longest period since a stretch that ended in 2005. That covers much of a era former BOE Governor Mervyn King described in 2007 as NICE - an acronym for “Non-Inflationary Consistent Expansion.”

While Carney said this month the inflation environment is benign, he also said the time for tightening is approaching and rate increases will be needed to meet the goal.

Michael Saunders, an economist at Citigroup Inc. in London, said inflation may stay around its current level through the early part of next year before edging up to about 2 percent in late 2015.

“The weakness in food prices may in part reflect specific factors,” he said in a note today. “With sterling’s rate a bit weaker in recent weeks plus rising domestic capacity use, we do not regard weakness in food prices as a lead guide to a general inflation downtrend in coming months.”

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