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Cheaper petrol, pork help record UK inflation fall

  Lower prices of petrol and pork in October helped British consumer price inflation to post its biggest drop since records began, falling to an annual rate of 4.5% from September’s peak of 5.2%.

 

Economists had expected Tuesday’s data to show inflation had eased only to 4.8%. The fall made a big Bank of England interest rate cut more likely in December, following a spectacular 1.5 percentage point reduction early this month which took rates to 3.0% -- their lowest level since the 1950s. “(This is) encouraging news,” said George Buckley, chief UK economist at Deutsche Bank. “That leaves the door open for a bigger cut than we’re currently expecting at the Bank’s December meeting, which is 50 basis points.”

The Bank of England aims for consumer price inflation to be at 2% over a two-year horizon but warned last week it was likely to undershoot this target, possibly by a large margin. The fall in CPI inflation was also reflected in retail price inflation, an older measure that includes housing costs and is used as the basis for many British wage deals, pensions, and inflation-linked bonds. RPI inflation fell to 4.2% from 5.0%, the biggest one-month drop since January 1993.

The CPI series started only in January 1997, although the Office for National Statistics said that estimates of CPI inflation before then suggested there would have been a bigger drop than last month’s in April, 1992. Gilts rallied after the data, with two-year yields dipping below 2% for the first time since records began 30 years ago.

Finance minister Alistair Darling welcomed the figures after months of popular outrage at the rising cost of fuel and food. “We are already seeing prices coming down, which I think is very helpful, but of course it needs to be accompanied by other measures which we will be announcing next week,” he told BBC television.

DEFLATION FEARS

The overall CPI price level fell 0.2% in October, the first monthly drop in prices since post-Christmas sales in January, and the first October fall since 2001. Falling transport costs after a 6% month-on-month drop in the cost of fuel and lubricants made up 0.5 percentage points of the 0.7 percentage point fall in annual CPI inflation. The cost of a barrel of North Sea oil is now below $52, compared with over $147 earlier this year.

Lower prices for pork, beef, computer games and DVDs accounted for the rest of the fall in inflation, the ONS said. The core measure of CPI, which excludes traditionally volatile food, energy, alcohol and tobacco prices, fell to 1.9% from 2.2%.

The fact that inflation is falling in sectors relatively unaffected by the past year’s energy and commodity price bubble pointed to a risk of deflation as the economy has gone into its first recession since the early 1990s, said Jonathan Loynes from consultancy Capital Economics. “This is the first step along a road that is likely to end in the first bout of deflation in the UK economy in almost half a century,” he said. Deflation is commonly defined as a broad-based, lasting fall in prices.

Retailers, which had absorbed some of the past year’s rises in raw material costs, appeared unable to pass them on now the economy was slowing, Loynes added. “It looks like strong competitive pressures and the slowdown in demand might be preventing that from happening -- seriously bad news for retailers’ profit margins,” he said. (Reuters)