18 Aug 2009
Aug. 18 (Bloomberg) -- The U.K. inflation rate unexpectedly held at 1.8 percent in July as the cost of computer games, DVDs and alcohol rose, a sign the economy is staving off deflation as the recession eases.The annual gain in consumer prices was the same as in June, which was the lowest level since September 2007, the Office for National Statistics said today in London. All 31 economists in a Bloomberg News survey predicted a reduction in the rate. On the month, prices stayed unchanged, compared with a median forecast for a 0.3 percent drop.
Bank of England Governor Mervyn King said last week that inflation is likely to be volatile in the short term as it stays below the 2 percent target. Central bank officials have expanded their money-printing program beyond its original limit to aid economic growth and fight the threat of deflation.
"Inflation is quite sticky while the Bank of England is still pushing down on the accelerator," said Nick Kounis, an economist at Fortis Bank Nederland Holding NV in Amsterdam and a former U.K. Treasury official. "The idea that there's a huge amount of slack in the economy that's going to bear down significantly on inflation just isn't coming out in the data."
Market Reaction
The pound rose as much as 0.3 percent against the dollar after the report. The U.K. currency traded at $1.6444 as of 9:59 a.m. in London.
Rising costs of games and DVDs created a "large" upward effect on the inflation rate in July, the statistics office said. Higher prices of alcohol and tobacco also held up the rate, officials said.
Core inflation, which strips out the cost of tobacco, alcohol, food and energy, accelerated to 1.8 percent in July, the fastest pace in eight months, the statistics office said.
ICAP Securities said today that investors should buy U.K. food retailers, including Tesco Plc and WM Morrison Supermarkets Plc, and sell food manufacturers, to take advantage of "high and rising" inflation starting next year. Long-term food price inflation is "here to stay," according to ICAP.
The Bank of England last week raised its forecast for inflation in the short-term to reflect higher oil prices, and smaller-than-anticipated drops in utility bills. The rate will probably drop below 1 percent later this year and may miss the central bank's goal in three years, the bank's predictions show.
Retailers have cut prices to drive sales growth. Asda, the U.K. supermarket chain owned by Wal-Mart Stores Inc., said on Aug. 13 that its second quarter same-store sales rose 7.9 percent, according to a statement on its Web site. "This growth has been driven by attracting more customers by lowering prices and improving product quality," Asda said in a statement.
Recovery Signs
Recent reports have shown the British economy may be on a path to recovery. Bank of England policy maker Andrew Sentance wrote in an article for the Sunday Times on Aug. 16 that he expects a return to growth in the second half. U.K. services expanded the most in 1 1/2 years and manufacturing grew for the first time in more than a year in July, surveys show.
Unemployment rose the most in 14 years in the second quarter, and the prospect of further job losses is keeping wages down. Excluding bonuses, average earnings grew 2.5 percent in the second quarter from a year earlier, the least since records began in 2001.
The retail price index, a cost-of-living measure used in wage bargaining, showed a 1.4 percent annual drop, compared with a 1.6 percent decline in June, the statistics office said.
The Bank of England this month expanded its bond purchase program by 50 billion pounds ($82 billion) to 175 billion pounds. Deputy Governor Charles Bean said last week that the inflation outlook will be the "guiding light" determining the timing of bank's withdrawal of its asset-purchase plan.
