LONDON--Annual inflation in the U.K. slowed in May to its lowest level
in more than two years, official data showed Tuesday, strengthening
expectations that the Bank of England will soon embark on a fresh
round of stimulus.
The Office for National Statistics said the consumer price index rose
2.8% on the year in May, compared with a rise of 3% in April, and fell
0.1% on the month. Economists had expected the yearly rate to remain
at 3%.
Annual inflation is the lowest since November 2009, while the fall in
the monthly rate is the first April-to-May decline since the ONS began
calculating the consumer price index in 1996.
Sterling dropped against the dollar and the euro immediately after the
data was released. The pound fell to as low as $1.5624 against the
buck. The euro traded up at GBP0.8050 against the pound.
The slowing pace of price rises should reassure the Bank of England's
rate-setting panel that price pressures in the U.K. economy are
easing, potentially spurring consumer spending as squeezed household
budgets recover.
Cooling inflation also clears the way for an extension of the Bank of
England's 325 billion-pound ($508 billion) stimulus program to protect
the U.K.'s already weak economy from a deepening of the euro-zone debt
crisis.
In a speech last week, BOE Governor Mervyn King signaled the central
bank's readiness to revive its quantitative easing program--the
purchase of government bonds with new money--if the U.K.'s economic
outlook darkens.
Ross Walker, an economist at Royal Bank of Scotland, said he expects
inflation in the U.K. to keep slowing on weakening global demand and
declines in commodity prices. He said the annual rate may even get
back to the BOE's 2% target by the end of the year--roughly six months
sooner than the central bank predicted in May.
"May's data do serve to lower the hurdle to QE as soon as July, should
the MPC wish to oblige," Mr. Walker said.
The ONS data showed smaller increases in prices for food, fuel and
energy compared with a year earlier, while the 0.1% decline in prices
from this April largely reflected falling gasoline prices.
Yet the data showed core inflation, which excludes volatile prices
such as energy, food, alcohol and tobacco, accelerated in May, nudging
up to 2.2% on an annual basis from 2.1% in April.
Write to Jason Douglas at jason.douglas@dowjones.com and
ilona.billington@dowjones.com
(Jessica Mead in London contributed to this article)
(END) Dow Jones Newswires
June 19, 2012 05:05 ET (09:05 GMT)
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