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UK CPI slips for the second month; eases immediate pressure on BoE to hike rates

FXStreet (Mumbai) - The Office for National Statistics today said British annual consumer prices declined 0.1 per cent from a year earlier reflecting weaker global commodity costs. The CPI has remained in the negative territory for a second month in a row, way below the BoE’s 2 per cent inflation target. For the first time, in October consumer prices fell for two months in a row on an annual basis.

Inflation has been at or close to zero for most of 2015. It had first slipped into the negative territory in April when prices fell for the first time in more than 50 years.

Inflation slides again

Core inflation rose to 1.1 per cent from 1 per cent. Retail price inflation figure for October was the weakest reading recorded since November 2009. RPI fell to 0.7 per cent in October from 0.8 per cent in September. Factory gate prices fell 1.3 per cent, in line with forecasts.

The house price inflation however looked up. It rose 6.1 per cent annually in September compared with 5.5 per cent in August.

Strong sterling and weak global commodity price cased CPI to decline

Number of factors can be held responsible for the slide in CPI. Sterling's strength when pitted against has put downward pressure on prices. It can be expected to continue to impact prices in future as well. Low global commodity prices have also contributed to the slide in CPI. The central bank has agreed that around four fifths of the shortfall in inflation is primarily due to lower oil prices and a strengthening in sterling.

The advantage gained with stronger clothing price growth was offset by food and alcohol and tobacco. The impact from rising tuition fees was also small and could do little to boost the CPI.

Low inflation can boost spending in case wage also rises

Low inflation is always read as a sign of economic fragility. It however relieves the pressure on household budgets particularly after years of wages falling in real terms post the financial crisis.

since February British annual inflation has moved in a narrow range of -0.1 to +0.1 per cent. It somewhat boosted the spending power of consumers just as their earnings began to grow more strongly, promoting economic growth in the process.

BoE not in any rush to hike rates

When the employment data was released on 11th November, it was seen that earning had registered growth slower than the central bank’s expectation. This data had backed the BoE’s stance to not hike raise interest rates in a hurry. Disputing recent figures published by ONS, the BoE said the cost pressures in the labour market were running below the level needed for inflation to return to target.

Now with CPI in the negative territory, there is little immediate pressure to increase borrowing costs from their record low. The BoE predicted that inflation would not rise above 1 per cent until the second half of 2016, and reach its 2 per cent target in two years, even if interest rate stayed on hold throughout next year.

Low inflation has been the primary reason for BoE to refrain from raising interest rates from the historic low of 0.5 per cent. Their dovish monetary policy stance was meant to stimulate demand and push inflation figures closer to their 2 per cent inflation target. Inflation is likely to stay close to zero for the rest of this year and rise only slowly next year, the central bank stated.

An uncertain global growth outlook continues to remain a worrying factor that has discouraged the BoE from increasing interest rates.

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