British inflation in modest slowdown

17th August 2010, Comments 0 comments

Britain's annual inflation rate eased last month, official data showed on Tuesday, as lower petrol and transport prices offset rising food costs.

Consumer Price Index (CPI) 12-month inflation, the government's target measure, fell to 3.1 percent in July from 3.2 percent in June, the Office for National Statistics (ONS) said in a statement.

However, because the level remains more than one percentage point above the Bank of England's target of 2.0 percent, central bank governor Mervyn King was obliged to write to finance minister George Osborne.

King told Osborne that the strength of inflation had "surprised" the bank's rate-setting Monetary Policy Committee (MPC) -- and warned that the outlook was difficult to judge.

"Inflation has been volatile over the past two years or so ... but on average over that period, inflation has been above the target," he wrote in an open letter to the chancellor of the exchequer.

"And the recent strength of inflation has surprised the MPC (Monetary Policy Committee).

He added: "How fast and how far inflation will fall are both difficult to judge, with substantial risks in both directions."

King also said that the current high inflation level was due to a recent increase in sales taxes, high oil prices and rising import prices.

"The MPC's central judgement remains that these effects will prove to have a temporary impact on inflation and are masking the downward pressure on inflation from spare capacity within companies and the labour market," he said.

On a monthly basis, July CPI inflation fell by a larger-than-expected 0.2 percent from June. Market expectations had been for a drop of 0.1 percent after a slight rise in June, the ONS added.

"July's UK consumer prices figures should provide some reassurance that underlying price pressures in the UK economy are starting to ease," noted Capital Economics analyst Jonathan Loynes.

Despite easing inflationary pressures, experts warned about the impact of soaring prices for many crucial commodities that are key ingredients for food manufacturing.

"There still remain considerable headwinds, with the recent rises in soft commodity prices yet to filter completely down through the supply chain," CMC Markets analyst Michael Hewson said.

"Higher wheat, barley, cocoa and sugar prices over the last few months are likely to have a significant inflationary effect going forward and these higher prices will no doubt continue to weigh on wider consumer demand as we head into the third quarter."

The BoE forecast last week that annual inflation would hold above 2.0 percent until the end of 2011 owing to a looming increase in sales tax, before falling under the target level in early 2012.

At the start of next year, Britain's coalition government will lift sales tax on goods and services to 20 percent from the current level of 17.5 percent as it seeks to slash an enormous public deficit.

The previous administration, which lost power in May, had last year cut sales tax to 15 percent in a temporary measure to help Britain out of recession.

However, VAT reverted back to 17.5 percent in January 2010, stoking inflationary pressures.

© 2010 AFP

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