Bloomberg News

U.K. Inflation Slows as Stores Discount Amid Recession Talk

January 17, 2012

(Updates with price cuts in eighth paragraph, Scottish Power in 11th.)

Jan. 17 (Bloomberg) -- U.K. inflation slowed in December to its weakest pace in six months as stores discounted clothing to boost sales and petrol prices fell, easing pressure on consumers amid concern the economy may already be back in recession.

Consumer prices rose an annual 4.2 percent compared with 4.8 percent in November and a peak of 5.2 percent in September, the Office for National Statistics said today in London. It was the biggest drop in the inflation rate since April 2009, the depth of the last recession. Prices rose 0.4 percent on the month.

The Bank of England forecasts inflation will slow sharply this year, providing relief to consumers as the European sovereign debt crisis and rising unemployment weigh on the recovery. Ernst & Young said yesterday a second recession may already be under way. The Bank of England will expand its 275 billion-pound ($423 billion) bond-buying program next month, economists at Citigroup Inc. and Nomura International predict.

“We’re going to see inflation drop very sharply over the next six months, which is quite good news from the point of view of the broader economy in terms of supporting consumer spending,” said David Tinsley, chief U.K. economist at BNP Paribas SA in London. “It’s still the case that there’s plenty of scope for more monetary loosening, or more quantitative easing.”

The pound rose against the dollar after the report and was trading at $1.5384 as of 11:29 a.m. in London, up 0.4 percent on the day. Bonds stayed lower, with the yield on the 10-year gilt up 4 basis points at 2.005 percent.

Core Prices

Core annual inflation, which excludes alcohol, food, tobacco and energy prices, slowed to 3 percent from 3.2 percent. Retail-price inflation, a measure used in wage negotiations, slowed to 4.8 percent from 5.2 percent. The retail-price index excluding mortgage-interest payments rose 5 percent, down from 5.3 percent.

The monthly increase in consumer prices was less than half the 1 percent gain seen a year earlier. Retailers including Marks & Spencer Plc and Tesco Plc cut prices in December to lure cash-strapped shoppers during the key holiday trading period.

There were monthly declines in the prices of clothing and footwear, petrol and alcoholic drinks, while gas and electricity costs were unchanged. Upward pressure on inflation came from landline and mobile telephone charges.

‘Welcome Relief’

The Bank of England predicts that inflation, which has been above its 2 percent target for more than two years, will ease to 1.7 percent at the end of 2012 as a January 2011 sales-tax increase drops out of the annual comparison and energy costs decline.

Slower inflation will be “welcome relief for family budgets,” the U.K. Treasury said in a statement. “Inflation is expected to keep falling through this year, helped by the price cuts announced by energy companies this month.”

Crude oil prices have fallen to $100 a barrel from about $115 a barrel in May, easing pressure on companies and consumers. EON AG and Scottish Power Ltd. cut their tariffs yesterday, joining other large energy suppliers jostling to offer the cheapest supply as wholesale costs fall.

Ernst & Young’s ITEM Club said yesterday the economy will probably shrink in the current quarter after contracting in the last three months of 2011, with no improvement until mid-year. The group cut its 2012 growth forecast to 0.2 percent from 1.5 percent.

--With assistance from Mark Evans and Scott Hamilton in London. Editors: Andrew Atkinson, Fergal O’Brien

To contact the reporter on this story: Jennifer Ryan in London at jryan13@bloomberg.net

To contact the editors responsible for this story: Fergal O’Brien at fobrien@bloomberg.net; Craig Stirling at cstirling1@bloomberg.net


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