British inflation rate slows in July

17th August 2010, Comments 0 comments

Britain's annual inflation rate eased in July, official data showed on Tuesday, but experts warned about the future impact of soaring commodity prices -- particularly wheat -- on the key measure.

Consumer Price Index (CPI) 12-month inflation fell to 3.1 percent in July from 3.2 percent in June, largely because of lower petrol and transport prices, the Office for National Statistics (ONS) said in a statement.

But food prices jumped 0.7 percent -- the largest monthly increase for two years -- driven by rising costs for fruit, meat and vegetables.

And inflation will probably be spurred even higher in the coming months, due to soaring prices for many commodities that are crucial for food manufacturing, according to analysts.

"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."

In particular, wheat prices have rocketed as a drought ravaged output in key producer Russia, forcing it to ban exports until the end of the year.

Wheat had surged as high as 8.68 dollars a bushel (about 25 kilogrammes) on Friday, August 6, touching the highest level since August 2008. They have since eased slightly on profit-taking and recent rainy weather in Russia.

"We suspect that the recent run up in wheat prices risks a more sustained period of higher food price inflation which could halt the downward progress of the CPI measure," said Investec economist Philip Shaw on Tuesday.

He added: "Wheat is the benchmark soft commodity which has a direct input to a wide range of Western processed foods, as well as being used as a foodstuff for livestock.

"Hence the price of wheat tends to have a noticeable influence on food costs in general."

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

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

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

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.

The BoE had forecast last week that annual inflation would hold above 2.0 percent until the end of 2011, before falling under the target level in early 2012.

© 2010 AFP

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