UK on track as inflation slows to 2.2%

UK INFLATION in October slowed more than economists had forecast and is now the closest it has been to the Bank of England’s 2 percent target since September last year.

Consumer prices rose 2.2 percent last month from a year earlier compared with 2.7 percent the previous month, the Office for National Statistics said yesterday. The median forecast of economists was for a reading of 2.5 percent.

Core annual inflation slowed to 1.7 percent, the least since September 2009. The rate was 2.2 percent in September and economists had forecast it would ease to 2 percent last month. Core inflation excludes alcohol, food, tobacco and energy prices.

From the previous month, consumer prices rose 0.1 percent in October, less than the median forecast for a 0.3 percent gain.

The central bank’s quarterly forecasts to be published today 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, the prospect of a pick-up in prices in the UK weighs 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, the chief international economist at ING Bank in London. “The inflation picture is much worse here than it is in Europe. [The] report may be just a flash in the pan.”

The largest downward effect on the 12-month inflation rate in October was from transport costs, including vehicle fuels and air fares.

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.

Retail price inflation, a measure used in wage negotiations and as a basis for the inflationlinked bond market, cooled to 2.6 percent last month from 3.2 percent in September.

Under central bank governor Mark Carney’s forward guidance policy, the bank has pledged to not to withdraw economic stimulus measures at least until unemployment falls to 7 percent. It projected in August that that threshold would not be reached until the end of 2016. Carney will present new projections today.

The bank’s new guidance framework is subject to caveats linked to above-target price increases.

Yesterday’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 Bank of England official. “We do not expect rapid consumer price rises to deal the knockout blow to the Bank of England’s forward guidance.”

Separate data from the statistics office showed factory output prices fell 0.3 percent in October from September. From a year earlier, prices rose 0.8 percent. Input costs fell 0.6 percent in October on the month and were down 0.3 percent from a year earlier.

UK house prices increased 3.8 percent in September from a year earlier. – Bloomberg