British inflation eases amid gloomy economic outlook

12th July 2011, Comments 0 comments

British inflation slowed unexpectedly in June, official data showed on Tuesday, but the news was overshadowed by downbeat trade data that sparked concern over the flagging economic recovery, analysts said.

The nation'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 revealed 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.

"Regarding the growth outlook for second quarter, the widening in the trade deficit in May ... is a further piece of evidence in favour of a marked deterioration relative to the first quarter," said Ken Wattret, chief eurozone economist at BNP Paribas.

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," added 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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