You are here

UK inflation returns to negative territory in September

LondonCloth131015.jpg
British inflation unexpectedly edged back into negative territory last month to match April's all-time low, after cheaper fuel and clothing pushed down average prices, official figures showed on Tuesday.

[LONDON] British inflation unexpectedly edged back into negative territory last month to match April's all-time low, after cheaper fuel and clothing pushed down average prices, official figures showed on Tuesday.

The Office for National Statistics said consumer price inflation dropped to an annual rate of -0.1 per cent, below economists' expectations for it to hold unchanged at zero, and along with April the lowest reading since March 1960.

British annual inflation has stuck in a narrow range of -0.1 to +0.1 per cent since February, giving a boost to the spending power of consumers just as their earnings have begun to grow more strongly too, boding well for economic growth.

Unlike policymakers in the euro zone, the Bank of England is relatively unconcerned about the risk of persistent price falls leading to deflation due to robust consumer demand and rising domestic wages.

However, the weakness in inflation is likely to encourage the central bank to take its time before starting to raise interest rates from their record low.

Last week the Bank of England said it did not expect inflation to reach 1 per cent until next spring - slightly later than it previously thought - and economists are increasingly pushing back earlier predictions that the central bank would start to raise rates in February 2016.

The central bank has said around three quarters of the shortfall in inflation from its 2 per cent target is due to short-run factors such as lower oil prices and a strengthening in sterling.

An ONS measure of core consumer price inflation - which strips out changes in the price of energy, food, alcohol and tobacco - held at 1.0 per cent compared with economists'expectations for it to rise slightly.

But cost pressures in the labour market are also running below the level needed for inflation to return to target, the BoE says, disputing recent ONS figures which showed unit labour costs rising at their fastest rate in two-and-a-half years.

There was a sharp split between price changes for goods - many of which rely on imports - and services, where costs are more heavily influenced by British rates of pay.

Goods prices showed their biggest annual drop on record, falling by 2.4 per cent on the year, while the rate of services inflation picked up to its fastest since October 2014. "The main downward pressures on CPI came from clothing, which rose more slowly this September than in recent years, and falling petrol and diesel prices," ONS statistician Richard Campbell said.

The timing of seasonal clothing discounts was becoming more variable, increasing the unpredictability of the impact of clothing prices on CPI on a month-to-month basis, he added.

More falls in the cost of manufactured goods for consumers appear to be in the pipeline, with factory gate prices down 1.8 per cent on the year, as forecast and similar to August.

The ONS also released figures for August house price inflation, which showed a 5.2 per cent annual rise across the United Kingdom as a whole unchanged from July.

Closely watched mortgage lenders' measures of house price increases have shown a big split in recent months. For September Halifax reported annual growth of 8.6 per cent while Nationwide said prices rose by 3.8 per cent.

REUTERS