U.K. Inflation Rate Drops to Lowest in Five Years

The U.K. inflation rate dropped in September by more than economists forecast to the lowest in five years as the worst recession in a generation purged cost pressures throughout the economy.

Consumer prices rose 1.1 percent from a year earlier, compared with 1.6 percent the previous month, the Office for National Statistics said in London. On the month, prices were unchanged for the first time in a September since records began in 1996.

Bank of England policy makers this month stuck to their plan to spend 175 billion pounds ($276 billion) of newly created money on assets to foster economic growth after five quarters of contraction. The U.K. may not have escaped recession in the third quarter, and the bank should consider buying more bonds to secure the recovery, the British Chambers of Commerce said today.

The main contributors to slower inflation were utility bills, food prices, and restaurant and recreation, the statistics office said. The 7.3 percent annual drop in prices for electricity, gas and other fuels was the biggest since records began. Transport and clothing costs rose on the year.

J Sainsbury Plc, the U.K.’s third-biggest supermarket owner, reported decelerating sales on Oct. 7 and said revenue growth will become more difficult to achieve as food inflation eases. Tesco Plc, the world’s third-largest retailer, said Oct. 6 that sales growth cooled due to slower food-price inflation.

Bank of England policy makers said in the minutes of the September meeting that inflation would probably be higher in the short-term than the committee had thought a month ago, though it was still likely to be extremely volatile.”

Core inflation, which strips out the cost of tobacco, alcohol, food and energy, was 1.7 percent in September compared with 1.8 percent in August, the statistics office said.

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

The Bank of England last week left the key interest rate at a record low of 0.5 percent and said it will spend the remainder of its planned bond purchases. The bank’s forecasts show inflation will probably drop below 1 percent later this year and miss its 2 percent goal in three years.

U.K. Inflation Rate Drops to Lowest in Five Years

TradingEconomics.com, Bloomberg
10/13/2009 11:43:03 AM