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UK inflation slips on fuel to lowest since 2009

UK inflation slipped further below the Bank of England’s two per cent target in February to its lowest rate in more than four years as motor-fuel prices fell.

Consumer prices rose an annual 1.7 per cent, the least since October 2009, compared with 1.9 per cent in January, the Office for National Statistics, or ONS, said on Tuesday in London. That matched the median estimate in a Bloomberg News survey.

The figures give the BoE scope to keep interest rates at a record low to support the recovery. Officials meeting this month saw the strength of sterling putting more downward pressure on prices and said further appreciation of the currency is possible as the UK recovers.

“Clearly below-target inflation facilitates the Bank of England keeping interest rates down at 0.5 per cent, where we believe they are highly likely to stay through 2014 and during the early months of 2015, despite the economy’s improved growth and markedly reduced unemployment,” said Howard Archer, an economist at IHS Global Insight.

The pound was trading at $1.6485 in early London trading, down 0.1 per cent from Monday. The 10-year government bond yield was little changed at 2.68 per cent. The figures represent a further easing of the 5-1/2-year squeeze on real wages that has pushed living standards to the lowest in a decade. Average weekly earnings grew 1.4 per cent in the three months through January. The 0.3 percentage-point gap between that figure and the February consumer-price inflation rate was the narrowest since April 2010.

Energy prices

The ONS said downward pressure came from gasoline prices, which fell 0.8 pence per litre compared with a rise of four pence a year earlier. Diesel prices fell 0.8 pence versus a year earlier gain of 3.7 pence. There was also pressure from gas and electricity prices and clothing and footwear, which rose less last month than a year earlier, the ONS said. Furniture, books and data-processing equipment exerted upward pressure on the index.

Consumer prices rose 0.5 per cent in February from the previous month. The core annual inflation rate, which excludes alcohol, tobacco, food and energy prices, rose 1.7 per cent versus 1.6 per cent in January.

Retail-price inflation, a measure used in wage negotiations and as a basis for payments on inflation-linked bonds, slowed to 2.7 per cent from 2.8 per cent. Inflation by that measure excluding mortgage-interest costs also slowed to 2.7 per cent from 2.8 per cent.

Pound gains

The pound reached the highest level since November 2009 versus the dollar last month amid growing evidence the economic recovery is gaining momentum. All nine Monetary Policy Committee members agreed the probability of inflation being above 2.5 per cent in 18-24 months was less than half, according to minutes of their March meeting.

The Office for Budget Responsibility, Britain’s fiscal watchdog, cut its 2014 inflation forecast last week to 1.9 per cent and said it expects a return to real income growth this year.

Separate data showed that pipeline price pressures are easing. Input costs for factories fell 0.4 per cent in February from the previous month and were down 5.7 per cent from a year earlier, the biggest annual drop since September 2009. An 11 per cent drop in crude-oil prices and a 15 per cent decline in the price of imported metals was behind the annual decrease.

The prices of goods leaving the factory gate were unchanged in February on the month and up 0.5 per cent from a year earlier.

The ONS also reported annual house-price growth accelerated to 6.8 per cent in January, the fastest pace since August 2010. In London, prices surged 13.2 per cent on the year.