The inflation data released by the Office for National Statistics was in line with expectations and put inflation below 4 percent for the first time since December 2010. A fall in fuel prices helped, as did the fact that last year’s sales tax hike dropped out of the annual comparison.
The U.K. consumer price inflation (CPI) rate peaked at 5.2 percent in September.
Bank of England Governor Mervyn King said inflation is likely to be near the 2 percent target by the end of the year, although “the pace and extent of the fall in inflation remain highly uncertain.’’
“The unwelcome combination of sluggish growth and high inflation over the past two years is a reflection of the need for the economy to rebalance following the financial crisis and associated deep recession, together with rises in the costs of energy and imports,’’ King said in a letter he is required to write to the government every quarter in which inflation is more than 1 percentage point above or below target.
“Although inflation is now falling broadly as expected, the process of rebalancing still has a long way to go. Growth remains weak and unemployment is high.’’
In its report on Britain’s credit rating, Moody’s Investor Service said the U.K. economy remains vulnerable to a deterioration in European economic and financial conditions.
Though inflation has been running above the 2 percent target since December 2009, rate-setters have kept borrowing costs at the record low base rate of 0.5 percent and recently approved another monetary stimulus in response to falling output — recent figures showed the U.K. economy contracted 0.2 percent in the last three months of 2011.
The central bank has held its policy line despite elevated inflation rates, arguing that price pressures would diminish this year. Markets will be interested to see if Wednesday’s quarterly economic projections from the Bank of England show inflation falling below target later this year.
Many economists think that’s a distinct possibility and that the Bank will back even more stimulus in the months ahead.
