British inflation dips to 3.2 percent, still above target

13th July 2010, Comments 0 comments

British annual inflation eased in June, dragged down by falling petrol (gasoline) costs and heavy discounting by retailers, but remained above the government's target level, official data showed on Tuesday.

Consumer Price Index (CPI) 12-month inflation, the government's target measure, dipped to 3.2 percent last month from 3.4 percent in May, according to the Office for National Statistics (ONS).

Analysts had forecast a drop to 3.1 percent, according to Dow Jones Newswires.

"Falling petrol and diesel prices are by far the main drivers to the downward pressure to CPI annual inflation between May and June," the ONS said in a statement.

Other downward price pressures came from sharp falls in the cost of clothing and footwear, which tumbled 2.1 percent in June.

On a monthly basis, CPI inflation rose 0.1 percent in June from May, while market expectations had been for no change.

Economists said that news of lower annual inflation would be welcomed by the Bank of England, whose main task is to keep the rate close to a target of 2.0 percent.

The BoE has forecast that annual CPI inflation will gradually fall back towards the target level later this year.

The central bank last week left interest rates at a record-low 0.50 percent, where they have stood for 17 months, as it assessed the impact of the government's deficit-slashing emergency budget amid stubbornly high inflation.

"Although inflation remains well above the target, the apparent cooling off in inflation should strengthen the case for the Bank of England to keep the base rate on hold at 0.50 percent," said economist Scott Corfe at the Centre for Economics and Business Research consultancy.

He added: "For the time being, the need for loose monetary policy to accommodate the government's proposed public spending cuts is likely to outweigh the need to bring inflation back to target."

However, inflation may spike in the longer term after finance minister George Osborne last month announced a sharp hike in tax on goods and services.

Value-added tax (VAT) will increase to 20 percent from the current 17.5 percent in January 2011.

© 2010 AFP

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