U.K. August Inflation Rate Drops

The U.K. inflation rate dropped in August by less than economists forecast as higher oil costs offset the effects of the recession

Consumer prices rose 1.6 percent from a year earlier, the least since January 2005, compared with 1.8 percent the previous month, the Office for National Statistics said. On the month, prices increased 0.4 percent

The Bank of England last week reiterated its plan to buy 175 billion pounds ($289 billion) of bonds to cement Britain’s recovery as inflation strays further below the 2 percent target. With unemployment at a 14-year high and the economic slump persisting, policy makers are struggling to fight off the threat of deflation.

Inflation slowed because utility bills didn’t increase this year and food costs dropped on the month by the most since 2000, the statistics office said.

The inflation rate was held up by higher transport costs as fuel prices rose and the cost of second-hand cars increased from July by the fastest pace on record, the statistics office said.

Oil costs are now more than double what they were in the fourth quarter of last year, when they dropped as low as $32.40 a barrel. The crude oil price has since risen close to $70 per barrel.

Core inflation, which strips out the cost of tobacco, alcohol, food and energy, was 1.8 percent in August. That’s the same as in July, which was the highest level since November 2008, the statistics office said.

The Bank of England last week left the key interest rate at a record low of 0.5 percent and said it would continue buying bonds with newly printed money. The bank’s forecasts show the consumer price index will probably drop below 1 percent later this year and miss its 2 percent goal in three years.

The retail price index, a cost-of-living measure used in wage bargaining, showed a 1.3 percent annual drop, compared with a 1.4 percent decline in July, the statistics office said. Excluding mortgage interest payments, retail prices rose 1.4 percent on the year, the most in three months.

U.K. August Inflation Rate Drops

TradingEconomics.com, Bloomberg
9/15/2009 9:08:26 AM