British inflation softens in May

15th June 2010, Comments 0 comments

British inflation softened last month, official data showed Tuesday, dampening the threat of higher interest rates in an economy braced for emergency measures to curb the nation's record deficit.

Consumer Prices Index (CPI) 12-month inflation, the government's target measure, fell to 3.4 percent in May from a 17-month peak of 3.7 percent in April, according to the Office for National Statistics (ONS).

The reading remained above the Bank of England's government-set target of 2.0 percent but was less than market expectations for a drop to 3.5 percent.

Economists said the news would likely dissuade the British central bank's monetary policy committee (MPC) from hiking rates any time soon.

"May's UK consumer prices figures provided some reassurance that the MPC will be able to avoid the nightmare scenario of having to raise interest rates just as an enormous fiscal squeeze hits the economy," said Jonathan Loynes at the Capital Economics consultancy in London.

British finance minister George Osborne will deliver the new coalition government's emergency budget next Tuesday and is widely tipped to axe public spending and raise taxes, in order to cut the deficit.

The ONS added Tuesday that, on a monthly basis, CPI inflation rose 0.2 percent in May from the previous month.

Downward price pressures came from the falling cost of meat, fruit, alcoholic drinks and tobacco. However, petrol prices rose in May -- but at a slower pace compared with a year earlier.

Despite softer inflation, economists added that the outlook was tilted to the upside, and cited widespread speculation that Osborne will lift taxation on goods and services next week.

According to various media reports, Osborne will lift the level of value-added tax (VAT) to 20 percent, from the current level of 17.5 percent.

"If, as seems likely, VAT is increased from 17.5 percent to 20 percent ... this will have a temporary upward impact on inflation," said economist Howard Archer at the IHS Global Insight consultancy.

The Bank of England had last week held its key lending rate at a record-low 0.50 percent as it had forecast a drop in inflation after April's spike.

The British central bank is charged by the government with keeping 12-month CPI inflation close to a 2.0-percent target.

The ONS added Tuesday that Retail Prices Index (RPI) annual inflation -- which includes the cost of home loans -- stood at 5.1 percent in May. RPI had surged to 5.3 percent in April, hitting the highest level since July 1991.

© 2010 AFP

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