Inflation drop could pave way for interest rate cut

Group Business Editor

Wednesday 19 September 2012

ANNUAL UK inflation dropped from 2.6% in July to 2.5% last month, despite a 3.5p-a-litre surge in petrol prices during August, giving the Bank of England scope to provide further monetary support to the ailing economy.

BANK OF ENGLAND: Falling inflation will give it scope to provide further support for the ailing economy, in the form of quantitative easing or a rate cut. Picture: Dan Istitene

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ian mcconnell business editor

The fall in annual consumer prices index inflation, which was in line with City forecasts, was revealed in figures published by the Office for National Statistics.

The ONS cited the downward impact on annual CPI inflation from the "furniture, furnishings, and carpets" category between July and August. Prices in this category rose by 0.9% overall this August, but by 2.8% in the same month of last year.

Clothing and footwear prices also contributed to the downward move in annual CPI inflation. Although they rose by 2.8% last month, this was less than a 3.7% jump in August 2011.The fact that domestic gas and electricity bills were unchanged overall between July and last month, in contrast to respective 1.7% and 1% rises in August last year, also helped keep a lid on the latest annual CPI rate.Although annual CPI inflation remains above the 2% target set for the Bank of England by the Treasury, it is down sharply from a figure of 5.2% in September last year. It had risen from 2.4% in June to 2.6% in July.Samuel Tombs, UK economist at consultancy Capital Economics, said: "August's fall in inflation suggests that July's rise was just a temporary blip in a gradual downward trend. Barring a further rise in oil prices, inflation still appears to be on track to reach the target of 2% before the year is out."Predicting that the "weak economy" should keep inflation low next year, Mr Tombs highlighted scope for the Bank of England's Monetary Policy Committee to boost the scale of its quantitative easing (QE) programme further from the current £375 billion and possibly cut UK base rates from their record low of 0.5%.He said: "While inflation's recent downward progress has been slow, the prospect of a further decline, below the MPC's target, should ensure that the committee feels free to provide the economy with further stimulus – in the form of more QE and perhaps even a rate cut – in the coming months."Howard Archer, chief UK economist at consultancy IHS Global Insight, said: "The easing back in consumer price inflation in August supports belief that the Bank of England will enact further stimulus to help the economy in the fourth quarter, despite some recent improved news on economic activity."Although there is a risk inflation will be sticky over coming months, and despite some recent improved data and surveys, extended weak economic activity rather than inflation remains by far the main problem facing the UK economy."Mr Archer projects a £50bn rise in QE in the fourth quarter. Trades Union Congress General Secretary Brendan Barber highlighted the impact of inflation on living standards at a time of weak growth in pay. He said: "Inflation is not falling fast enough, particularly as wage growth is so anaemic. "Real wages have been shrinking for nearly four years now and the prospect of an (easing) in living standards any time soon looks remote. "Worse news lies ahead for low-paid workers if the Government decides to freeze benefits. The combination of low wage growth, higher indirect taxes, in-work benefit freezes and tax credit cuts add up to an unprecedented attack on the living standards of low-paid workers and their families."Annual inflation on the old all-items retail prices index measure, still used in some wage negotiations, fell from 3.2% in July to 2.9% in August.Chris Williamson, chief economist at financial information company Markit, said: " With pay rising at just 1.5% per annum, and inflation running at 2.5%, incomes are still being squeezed by 1% per annum in real terms."That squeeze is nothing like as severe as 3%-plus rates at which real incomes were falling throughout much of last year ... but nevertheless still represents a fall in spending power and hits real living standards, which will dampen consumer spending and limit the economy's potential for recovery if it persists."

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Inflation drop could pave way for interest rate cut

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