UK inflation rate's unexpected drop takes pressure off BoE

A bus passes the Bank of England in London.
A bus passes the Bank of England in London. PHOTO: REUTERS

LONDON (BLOOMBERG) - Inflation in the United Kingdom unexpectedly slowed in June, giving respite to Bank of England policy makers concerned that price growth was getting out of hand.

The inflation rate slipped to 2.6 per cent, the Office for National Statistics said on Tuesday. It's the first drop in the annual rate since October, and economists had forecast that it would hold at the four-year high of 2.9 per cent reached in May.

The data weakens arguments for an immediate interest-rate hike that a minority of policy makers supported at the last BOE decision as inflation looked set veer further above the 2 per cent target. There are also signs economic growth is cooling as consumers, the engine of growth for the past year, start to rein in spending.

The pound reversed gains to fall 0.2 per cent to US$1.3024 as of 9:38 a.m. in London.

Motor fuels and recreation items such as games were the main contributors to the lower inflation rate, the report said. Core inflation - which excludes volatile food and energy prices - slipped to 2.4 per cent from 2.6 per cent in May. Food prices fell 0.2 per cent on the month.

The pound's 12 per cent decline since the UK voted to leave the European Union has helped fuel a pickup in prices. There are signs that pressure is now easing. Import prices for factories slipped 0.2 per cent on the month and the annual rate of gains slowed to 9.9 per cent from 12.3 per cent.

The BOE announces its next policy decision and publishes new forecasts on Aug. 3. Officials voted 5-3 to keep rates on hold last month and have been drawing the battle lines in recent weeks over whether to stifle rising inflation. While the economy has held up better than many expected in the wake of the Brexit referendum, growth slowed to 0.2 per cent in the first quarter of the year.

Governor Mark Carney has said he's looking at how consumers react to faster price gains in determining whether he'll support tighter monetary policy. Chief Economist Andy Haldane last month indicated he may start voting for a rate increase soon.