U.K. Inflation Rate Unexpectedly Held at 1.8%

The U.K. inflation rate unexpectedly held at 1.8 percent in July as the cost of computer games, DVDs and alcohol rose, a sign the economy is staving off deflation as the recession eases.

The annual gain in consumer prices was the same as in June, which was the lowest level since September 2007, the Office for National Statistics said today in London.

Bank of England Governor Mervyn King said last week that inflation is likely to be volatile in the short term as it stays below the 2 percent target. Central bank officials have expanded their money-printing program beyond its original limit to aid economic growth and fight the threat of deflation.

Rising costs of games and DVDs created a large” upward effect on the inflation rate in July, the statistics office said. Higher prices of alcohol and tobacco also held up the rate, officials said.

Core inflation, which strips out the cost of tobacco, alcohol, food and energy, accelerated to 1.8 percent in July, the fastest pace in eight months, the statistics office said.

The Bank of England last week raised its forecast for inflation in the short-term to reflect higher oil prices, and smaller-than-anticipated drops in utility bills. The rate will probably drop below 1 percent later this year and may miss the central bank’s goal in three years, the bank’s predictions show.

Retailers have cut prices to drive sales growth. Asda, the U.K. supermarket chain owned by Wal-Mart Stores Inc., said on Aug. 13 that its second quarter same-store sales rose 7.9 percent, according to a statement on its Web site. This growth has been driven by attracting more customers by lowering prices and improving product quality,” Asda said in a statement.

The retail price index, a cost-of-living measure used in wage bargaining, showed a 1.4 percent annual drop, compared with a 1.6 percent decline in June, the statistics office said.

The Bank of England this month expanded its bond purchase program by 50 billion pounds ($82 billion) to 175 billion pounds. Deputy Governor Charles Bean said last week that the inflation outlook will be the guiding light” determining the timing of bank’s withdrawal of its asset-purchase plan.

U.K. Inflation Rate Unexpectedly Held at 1.8%

TradingEconomics.com, Bloomberg
8/18/2009 9:19:15 AM