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U.K. Inflation Unexpectedly Eases; Lowest Since 2009

U.K. Inflation Unexpectedly Eases; Lowest Since 2009

U.K.'s annual consumer price inflation eased for a third straight month in June to the lowest level since November 2009, helped by falling fuel prices and heavy discounting to boost sales, the latest figures from the Office for National Statistics showed Tuesday.

Consumer price inflation fell to 2.4 percent in June from 2.8 percent in May. Economists expected the rate to remain unchanged at the May level. A lower inflation rate was last recorded in November 2009, when it was at 1.9 percent.

"This reduces further the squeeze on consumers' purchasing power and facilitates further Quantitative Easing by the Bank of England later this year should the economy fail to show underlying improvement over the coming months," IHS Global Insight chief economist Howard Archer said.

Earlier this month, the Bank of England expanded the size of its asset purchase program by GBP 50 billion to aid the weak economic activity.

The Bank of England estimates the inflation rate to be around 1.6 percent in two years time. The central bank, in its latest edition of the Quarterly Bulletin, said that upside risk to inflation has "receded a little" during recent months.

Despite falling for a third month in a row, the headline inflation rate stayed above the central bank's 2 percent target.

The statistical office said that the largest downward pressures to the change in CPI annual inflation came from clothing and footwear, transport and food and non-alcoholic beverages,

Prices of clothing and footwear fell 0.8 percent annually. The rate of price increase for food and non-alcoholic beverages eased to 2.3 percent, the lowest in two years. Transport costs rose 0.9 percent, the slowest pace since August 2009, led by falling fuel costs.

The core consumer price index, that excludes energy, food and alcoholic beverages and tobacco, rose at a slower pace of 2.1 percent year-on-year in June compared to a 2.2 percent rise in the previous month.

"The main surprise was the drop in core inflation," Capital Economics Chief UK Economist Vicky Redwood said. "A period of sharp discounting this time last year had suggested that base effects would push the core rate up. But instead, it looks as though this year saw even more aggressive discounting," the economist noted.

On a monthly basis, the consumer price index fell 0.4 percent in June, marking the largest month-on-month drop in prices since the CPI was launched in 1996. This followed a 0.1 percent dip in the previous month. The index was expected to fall 0.1 percent in June.

Retail price inflation eased to 2.8 percent in June from May's 3.1 percent. The annual rate is the lowest since December 2009. The inflation rate was below the 3 percent rate expected by economists.

Falling inflation and higher consumer spending may help the economy to shrug off a recession this year, a report from Ernst & Young ITEM Club showed Monday. ITEM Club said inflation should hit 1.7 percent by the end of the year, giving consumers extra cash in their pockets to spend on High Street.

According to a recent report from the British Retail Consortium, falling food costs and easing commodity price pressures pulled down shop price inflation to its lowest level in two and a half years in June.

by RTT Staff Writer

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