Britain's easing inflation leaves analysts gloomy

12th July 2011, Comments 0 comments

British inflation slowed surprisingly in June, official data showed on Tuesday, but this is unlikely to kick-start better fortunes for the economy owing to bad trade figures, analysts said.

Britain's 12-month inflation slowed unexpectedly to 4.2 percent last month from 4.5 percent in May as cheaper toys and televisions helped to offset high food and energy prices, the Office for National Statistics said.

Consumer Prices Index inflation also surprisingly fell by 0.1 percent in June from May on a month-on-month basis, the ONS added.

Analysts had forecast the annual rate to remain at 4.5 percent, which had been the highest level since September 2008, and predicted a month-on-month gain of 0.2 percent, according to a poll by Dow Jones Newswires.

"June's better than expected consumer prices figures brought signs that underlying price pressures might be starting to ease," said Jonathan Loynes, chief European economist at Capital Economics research group.

He added: "May's dreadful trade figures... appeared to put another dent in hopes that strong growth in net exports will help the economy to withstand the effects of the fiscal consolidation" or Britain's attempt to reduce its debt.

Britain's trade-in-goods deficit widened in May from the level in April, the ONS also said on Tuesday.

The deficit grew to £8.5 billion ($13.5 billion, 9.6 billion euros) in May from an upwardly-revised £7.6 billion in April. Analysts had forecast a deficit of £7.2 billion in May.

"The weakened trade performance in May adds to concerns that the UK economy saw minimal growth at best in the second quarter," said Howard Archer, a senior analyst at the IHS Global Insight consultancy.

British gross domestic product (GDP) expanded by 0.5 percent in the first three months of 2011 but that left activity broadly flat over the past six months after a 0.5-percent contraction in the previous quarter.

"The preliminary estimate for GDP growth in the second quarter of 2011 is likely to be extremely weak and, in our view, this gives the Bank of England more than enough rationale for keeping interest rates on hold this year," said Scott Corfe, an economist at the Centre for Economics and Business Research.

The Bank of England last week voted to hold its key interest rate at a record low level, in contrast to the European Central Bank, as policymakers set aside inflation concerns and sought to shore up Britain's flagging recovery.

The BoE's monetary policy committee decided to hold borrowing costs at just 0.50 percent, where they have stood since March 2009.

By comparison, the ECB last week ramped up its interest rates by a quarter-point to 1.50 percent, the second such hike since April as it seeks to tame inflationary pressures across the eurozone.

Policymakers normally raise interest rates to combat high inflation but the BoE's hands have been tied by Britain's recent flat economic growth. Britain publishes the first official estimate of GDP for April-June on July 26.

© 2011 AFP

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