Relief for the Bank of England as inflation rate hits two-year low

London: Inflation slowed more than economists had forecast in April, cooling to a level that relieves Bank of England Governor Mervyn King from the task of writing a letter to the government to explain why it's above its limit.

Consumer prices rose 3 per cent from a year earlier, down from 3.5 per cent in March, the Office for National Statistics said today in London.

Economists had set their forecast at 3.1 per cent in a Bloomberg News survey.

The rate is the first to fall within government boundaries since February 2010.

King said last week that while Britain's inflation rate will fall more slowly to the bank's two per cent target than previously forecast, slack in the economy would put downward pressure on price growth.

The Monetary Policy Committee (MPC) halted expanding its so-called Quantitative Easing (QE) programme this month even as the debt crisis in Europe worsened and the UK slipped into its first double-dip recession since 1975.

"These figures give the MPC slightly more leeway to undertake more QE to cushion the UK economy from the Eurozone turmoil," said Vicky Redwood, economist at Capital Economics Ltd in London. "We expect core price pressures to ease further in response to contracting output and weak pay growth."

The International Monetary Fund said Britain requires further monetary easing to boost its economy. Sterling dropped as much as 0.5 per cent and was trading at $1.5779 in London yesterday, down 0.4 per cent on the day.

Core Prices

From the previous month, consumer prices rose 0.6 per cent in April, matching the median forecast in a Bloomberg survey.

The decline in the annual rate was led by the timing of the Easter holiday and price changes in the transport, beverages and clothing categories.

Core inflation, which excludes alcohol, food, tobacco and energy prices, slowed to 2.1 per cent from 2.5 per cent.

Retail-price inflation, a measure used in wage negotiations, eased to 3.5 per cent from 3.6 per cent. The retail-price index excluding mortgage-interest payments showed an annual gain of 3.5 per cent.

While inflation has slowed down, it has been above the central bank's 2 per cent goal for 29 months.

King is obliged to write quarterly to the government when the rate differs from the target by more than 1 percentage point, explaining why price gains have deviated from the goal and explain what measures the bank intends to take.

"Inflation is down and back within the target range for the first time since 2010, which is good news and will provide relief for family budgets," Chloe Smith, the Economic Secretary to the UK Treasury, said.

The central bank's Inflation Report published last week shows annual consumer-price gains slowing to two per cent by about the middle of next year, and reaching about 1.6 per cent in two years. The bank publishes the projections as fan charts, and will release the exact data underlying the assessment this week.

"For once, there are reasons for thinking that CPI will come back down in line with forecasts, and may even undershoot," said David Tinsley, an economist at BNP Paribas in London and former central bank official. "They could easily shift to doing more QE if things got messy."

The increase to officials' near-term projection for inflation reflects "higher energy prices and indirect taxes", King said on May 16. "But underlying domestic inflationary pressure is likely to remain muted as the slack in the labour market continues to restrain wages," bringing down the inflation rate.

Oil hike cuts into incomes

William Morrison Supermarkets Plc, the smallest of the UK's four main supermarket chains, said on May 3 that sales declined for the first time in almost seven years in the first quarter as rising prices for oil and commodities affects consumer incomes and competitors offered more vouchers.

Bank of England policy makers held their bond-purchase programme earlier this month. Minutes of the May 9-10 policy meeting, showing exactly how policymakers voted, are due to be published today.

As well as injecting more stimulus, the Chancellor of the Exchequer, George Osborne, should consider greater fiscal enhancements including temporary tax cuts, the Washington-based IMF said in its annual review of the UK, published yesterday.

"Fiscal easing and further use of the government's balance sheet should be considered if downside risks materialise and the recovery fails to take off," the lender said.

"If growth does not build momentum and is significantly below forecasts even after substantial additional monetary stimulus and further credit-easing measures, planned fiscal adjustment would need to be reconsidered."