UK inflation falls more than expected, reduces chance of 2014 rate rise

[August 19, 2014]  By Andy Bruce and Sarah Young

LONDON (Reuters) - British inflation eased more than expected in July and the pace of house price growth slowed in June, according to data that underscored the Bank of England's message that it is in no rush to hike interest rates.

Consumer prices rose 1.6 percent on the year in July, the Office for National Statistics said on Tuesday, down from a five-month high of 1.9 percent in June.

Economists polled by Reuters had forecast that inflation would fall to 1.8 percent. After the data's release, they said the figures reduced any remaining pressure on the BoE to raise interest rates this year.

Last week, some economists pushed back their expectations for the BoE's first rate increase, to February instead of November, after the central bank slashed its forecasts for wage growth this year.

Sterling fell to a four-month low against the dollar and British government bonds rose after the data.

Separate data showed annual house prices grew 10.2 percent in June, down from 10.4 percent in May. The ONS said house prices rose 10.2 percent during the second quarter compared with a year ago, the biggest annual increase since the third quarter of 2007.
 

But the first annual fall in factory-gate prices since 2009 underlined how weak inflation is by most measurements.

"This further eases the pressure on the BoE to consider near-term interest rate rises and pushes the balance more in favor of a delay to rate hikes versus our current November official view for the first policy tightening move," said James Knightley, an economist at ING.

Until last December, annual inflation had exceeded the Bank of England's 2 percent target every month since December 2009, eroding the spending power of households and making the fall in living standards a political issue before next year's election.

The fall in inflation this year has helped the Bank of England to hold off on raising interest rates, despite Britain's surprisingly strong economic recovery.

Compared with the previous month, the consumer price index in July was down 0.3 percent, the ONS said. The biggest negative contribution to inflation in July was clothing and footwear.

Growth in property prices continued to be led by London, where they rose 19.3 percent in June, down slightly from 20.1 percent in May.

Other surveys have also pointed to slowing house-price growth, including in London. Last week, the Royal Institute of Chartered Surveyors suggested the London property market is starting cool off quickly.

An underlying measure of inflation, which strips out increases in energy, food, alcohol and tobacco, rose by 1.8 percent on the year in July.

The ONS said consumer price inflation for the second quarter as a whole was 1.7 percent - in line with the BoE's estimate for the period.

Data also released by the ONS on Tuesday showed that factory-gate prices fell by 0.1 percent in annual terms, the weakest level since October 2009 and slightly below economists' predictions for no change.

(Editing by Larry King)

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