Eurozone inflation slows in July

29 July 2011 Last updated at 10:26 GMT Some economists now think the ECB will leave interest rates unchanged at 1.5% for the rest of 2011 Eurozone inflation unexpectedly slowed in July to 2.5%, raising questions about when the European Central Bank (ECB) might raise interest rates again.

The preliminary estimate is down from 2.7% in June, according to the European Union statistics office Eurostat.

The July reading comes as a surprise after data earlier this week suggested inflation in Germany, Europe's largest economy, edged up to 2.4%.

The ECB has raised rates twice so far this year to try to control inflation.

The central bank wants to keep inflation below 2%.

'Compelling case'

No change had been expected in the inflation rate in July.

It is not clear what drove the decline, as Eurostat's initial estimate does not give a breakdown of the numbers - that is only released with the final estimate.

Economists said that the chance of the ECB raising rates from the current 1.5% before the end of the year now appeared less likely.

"While a further interest rate hike in the fourth quarter is clearly very possible, we suspect that slowing eurozone growth and recurrent sovereign debt problems will present an increasingly compelling case for the ECB to hold off from further monetary policy tightening this year," said Howard Archer from IHS Global Insight.

"We also anticipate that the case for further ECB action in 2011 will be diluted by mounting evidence that the second-round inflationary effects from higher energy and commodity prices are being contained.

"We currently expect the ECB to keep interest rates at 1.5% through the rest of 2011, then lift them gradually further to 2.25% by the end of 2012."

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UK inflation slows unexpectedly

12 July 2011 Last updated at 09:35 GMT Falling prices for toys, games and hobbies helped bring inflation down The UK inflation rate fell unexpectedly in June, with the Consumer Prices Index (CPI) measure dropping to 4.2%.

Markets had expected the figure to hold steady again at 4.5%.

The Retail Prices Index (RPI) measure of inflation - which includes mortgage interest payments - also fell, from 5.2% to 5%, according to the Office for National Statistics.

The slowdown came courtesy of falling prices for games, toys and hobbies, as well as for clothing and footwear.

'Aggressive discounting'

Clothing prices fell 1.9% compared with the previous month, led by falling prices for women's outerwear and footwear, as summer sales began early, the ONS said.

"Seemingly the ONS is picking up more aggressive discounting in some of the more discretionary spending areas," said Ross Walker, economist at RBS Financial Markets.

The price data echoes poor retail sales revealed earlier on Tuesday by the British Retail Consortium, which suggested that shops which had cut prices aggressively had seen a small recovery in volumes.

The ONS also said that the cost of audio-visual equipment also eased, thanks to discounting on some products.

Meanwhile, food costs continued to rise sharply, jumping 0.9% in the month, with notable increases in the cost of bread, cereals, meat, milk, cheese and eggs.

Yet to peak

Despite the fall in June's inflation rate, the figures mean the CPI rate has still overshot the Bank of England's 2% target for 35 of the past 41 months.

Continue reading the main story

Anyone looking for evidence of homegrown price pressures will struggle to find it in the latest inflation numbers.”

End Quote Stephanie Flanders Economics editor, BBC News Earlier this month, the Bank's monetary policy committee voted again to maintain interest rates at the record low of 0.5%.

"The retreat in consumer price inflation in June boosts the case for the Bank of England to hold fire on interest rates for many more months to come to give the fragile, faltering economy every chance to develop growth momentum," said Howard Archer, economist at IHS Global Insight.

Economists also said the data revived the possibility that the Bank might decide to increase its "quantitative easing" programme of buying up government debt in order to pump more cash into the economy, if the recovery falters.

It comes as separate data showed the UK's trade deficit increased in May, putting a further dampener on the economy.

Declan Curry finds out whether inflation is sweet or sour

Core inflation - which strips out volatile food and fuel prices and is closely watched by the Bank - fell from 3.3% to 2.8%, its lowest level since November.

"The fall in the core rate... might be the first real sign that the weakness of households' spending power is starting to bear down on underlying price pressures in the High Street," said Jonathan Loynes of Capital Economics.

But he warned that despite the fall, inflation had probably yet to peak, with a rise to 5% or above still very likely, due to rising energy and commodity prices.

A 15%-20% rise in household energy bills is expected to start affecting inflation data from August.

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UK inflation holds steady at 4.5%

14 June 2011 Last updated at 16:27 GMT Michelle Harrison from TNS explains how people's shopping habits have changed

UK Consumer Prices Index inflation held steady at 4.5% in May, new data shows.

It means the CPI rate has now overshot the Bank of England's 2% target for 34 of the past 40 months.

The Retail Prices Index (RPI) measure of inflation - which includes mortgage interest payments - was also unchanged at 5.2%, according to the Office for National Statistics (ONS).

But analysts said rising energy prices meant inflation was likely to resume its upward path in the coming months.

"With the announcement of higher utility prices coming through by the summer, there's a good chance we'll be looking at a 5% plus inflation rate by the autumn," said Peter Dixon at Commerzbank.

Fuel and food prices continued to be the main contributors, with both components up 1.3% from April.

Air and sea transport costs fell sharply in May, but not enough to fully reverse an even sharper jump in costs in April for the Easter break.

Over the course of the past 12 months, transport costs remain the biggest contributor to inflation.

Meanwhile, alcoholic drinks and tobacco have now recorded a 9.8% increase since last year - the highest year-on-year rise on record - thanks in part to the VAT rise.

Fuel prices also accelerated, up 13.7% compared with a year ago.

Bank resistance

The overall inflation figure was in line with market expectations.

It follows a rise to 4.5% in April - the highest inflation rate since October 2008 - from 4% in March.

The Bank of England expects CPI inflation to rise above 5% in the next three months, well above its 2% target, and analysts are also expecting the rate to increase.

Continue reading the main story

Neither the Bank of England nor any City commentator expects inflation to fall in the next six months”

End Quote Stephanie Flanders Economics editor, BBC News "Not only did transport inflation - airfares in particular - not fall all the way back after last month's Easter-related jump, but food price inflation also rose a bit more sharply than we had expected," said Jonathan Loynes of Capital Economics.

"Further rises in the latter, along with recently announced further energy price hikes, are likely to take the headline inflation rate above 5% perhaps, and perhaps even above 5.5%."

Last week, Scottish Power - which supplies 2.4 million UK households - said it would increase the cost of gas by 19% and the cost of electricity by 10% from 1 August.

The Bank of England has resisted calls to raise interest rates - seen as the most effective policy tool in combating inflation - on the basis that temporary, external factors, such as rising oil and food costs, are driving price rises.

It believes raising rates could undermine the UK's fragile economic recovery.

Rate move Continue reading the main story

I try to keep my husband well fed. I will have less. I've been hungry, I've gone to bed crying because I've been hungry. There are bad weeks and good weeks, but I just keep going”

End Quote Most economists agree with the Bank that inflation will fall back sharply next year, when the effect of the VAT increase drops out of the data and household energy bills are expected to stabilise.

And the Bank will have noted that core inflation fell back to 3.3% from the record high of 3.7% set in April.

Core inflation strips out volatile food and fuel prices, and is closely watched by the Bank as a signal for longer term inflation trends.

Earlier this month the Bank held rates at a record low of 0.5% for the 27th month in a row.

The Bank is widely expected to hold off raising rates until after the summer, and perhaps even until 2012 - a view reinforced by the latest data.

However, for the previous four months, three members of the Bank's rate-setting Monetary Policy Committee have voted to increase rates.

Savers' pain

People on low incomes have suffered higher inflation than those on higher incomes in the past decade, according to a study released on Tuesday by the Institute for Fiscal Studies.

The IFS said the difference in fortunes had been particularly marked since 2008, and pensioners on state benefits had been especially hard hit.

Continue reading the main story

When you retire, you think you have put enough aside to see you through”

End Quote Mandy Snelling Knit and Natter group member People on lower incomes spend a higher proportion of their money on gas, electricity and food, the cost of which has risen sharply, while those on higher incomes have benefited more from lower mortgage rates.

"Many workers have had no pay increase this year and even those who have are finding their household budgets stretched to breaking point, as prices rise twice as fast as pay," said Brendan Barber, general secretary of the TUC.

"But raising interest rates now would only make matters worse."

Among those hardest hit by the continuing high rate of inflation are savers.

The effect of inflation on savings means that ?10,000 invested five years ago, allowing for average interest, inflation and tax at 20% would have the spending power of just ?9,441 today, according to financial information service Moneyfacts.

"Rising inflation means hundreds of thousands of savers need accounts paying a staggering 5.63% before they earn a real rate of return on their savings," said Sylvia Waycot from financial information service Moneyfacts.

"This is going to be pretty difficult bearing in mind the average interest offered on an easy access savings account is 0.89%."

Basic rate taxpayers have just one account, a fixed rate Isa, which negates the effects of CPI inflation, according to Moneyfacts. There are no fixed rate accounts available for any taxpayer that beats RPI inflation.

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China inflation at 34-month high

14 June 2011 Last updated at 11:24 GMT The rise in food prices has hit a lot of Chinese shoppers in the pocket Inflation in China hit its highest level in 34 months despite the government's efforts to rein in rising prices.

Consumer prices in China rose by 5.5% in May, compared with the same month last year, according to the National Bureau of Statistics.

Food prices continued to be the biggest factor as they surged by 11.7%

The rising cost of food and commodities have pushed up the cost of living and become a hot political issue in China.

Analysts warned that prices are likely to rise even further.

"For now, it seems certain that China's CPI will hit 6% in June," said Xu Biao of China Merchants Bank.

Rate rise

Chinese authorities have said that fighting rising prices is a top priority for them.

It has set a target of keeping the inflation rate at 4% for the year.

The country's central bank has raised interest rates four times since October last year, in an effort to curb lending and rein in rising prices.

Analysts said that the latest data is likely to force the bank to raise the cost of borrowing once again.

"CPI reached a new record, increasing concerns of another interest rate rise," said Xian Fang Ren of IHS Global Insight

"We expect the central bank to raise interest rates next week," Mr Ren added.

Inflation is a particular concern in fast-growing economies across Asia. region.

In India, the wholesale price index of inflation rose faster than expected in May to 9.05%, caused partly by an increase in the cost of manufactured goods.

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UK inflation rate jumps to 4.5%

17 May 2011 Last updated at 11:05 GMT Watch: Phil Gooding from the ONS explains the factors behind the jump in inflation

The UK Consumer Prices Index (CPI) annual rate of inflation rose to 4.5% in April, up from 4% in March.

The rise was due to a jump in transport costs, particularly Easter rises in air and sea fares, and alcohol and tobacco.

However, the Retail Prices Index (RPI) measure of inflation - which includes mortgage interest payments - fell slightly to 5.2% from 5.3% in March.

The rise in CPI was bigger than analysts had forecast and follows a surprise fall in the index last month.

CPI is now at its highest level since October 2008.

The Office for National Statistics (ONS) said "by far the largest upward effect" on prices came from air transport, where fares rose by 29% between March and April. Sea fares rose by 22.3%.

It said the fact that Easter fell much earlier last year and did not affect April 2010 CPI partly explained the jump in prices.

Alcoholic drinks and tobacco rose by a record 5.3% in April.

These price rises more than offset a 1.3% fall in clothing and footwear prices.

Continue reading the main story

"Choppy": it's the word that Mervyn King and George Osborne both like to use to describe Britain's recovery. It describes the inflation outlook as well”

End Quote Stephanie Flanders Economics editor, BBC News The Governor of the Bank of England Mervyn King was forced to write a letter to Chancellor George Osborne explaining why the inflation rate was more than 1% above the Bank's target rate of 2%.

He reiterated his view that high inflation was due to the "increase in VAT to 20% in January, higher energy prices and increases in import prices".

April was the 17th month in a row that the inflation rate was at least one percentage point above target, and the governor has to write to the chancellor every three months while it remains so.

Higher fuel bills

In March, inflation had fallen to 4% from 4.4% in February.

The return of accelerating price rises after March's respite will put further pressure on the Bank of England to raise rates sooner rather than later.

"April's rise in CPI inflation confirms that March's drop was just a temporary reprieve - inflation will probably get to 5% or above over the coming months," said Vicky Redwood at Capital Economics.

Last week, the Bank of England said it expected inflation to hit 5% later this year, largely due to higher utility bills.

Continue reading the main story Hugh Pym Chief economics correspondent, BBC News

Another inflation shock, with City predictions of a 4.2% rate overtaken by the reality of 4.5% inflation, the highest since October 2008.

There were extenuating factors (there always are!). With Easter falling in late April, air, rail and ferry fares were much higher than they were in April the previous year.

Duty increases on alcohol and tobacco also had an upward effect. But with no fuel duty increase, inflation was lower than it might have been.

Whatever the factors at work, the underlying reality is the same - households are feeling the squeeze.

With pay rises running at about 2%, an inflation rate more than double that is cutting the spending power of consumers.

It still expects inflation to fall back towards the Bank's target rate of 2% towards the end of next year.

The increasing pressure to raise rates following the jump in inflation was reflected in the currency markets, where the pound rose by more than half a cent against the dollar to $1.6285, and by almost 0.4 cents against the euro, to 1.1460 euros.

However, some analysts argued that this month's figures meant little in the context of longer-term price rises.

"Almost all of the pick-up in CPI inflation was due to higher transport costs caused by the timing of Easter, and this is likely to unwind next month," said Andrew Goodwin, senior economic adviser to the Ernst & Young Item Club.

"Abstract from this issue and the picture is little changed and there are few implications for policy."

He does not expect the Bank to raise rates before November at the earliest.

The Bank has resisted calls to raise interest rates - seen as the most effective policy tool in combating inflation - on the basis that temporary, external factors, such as rising oil and food costs, are driving price rises.

It believes raising rates would undermine the UK's fragile economic recovery.

For this reason, earlier this month it held rates at a record low of 0.5% for the 26th month in a row.

However, for the previous three months, three members of the Bank's rate-setting Monetary Policy Committee have voted to increase rates.

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Indian inflation slows in April

16 May 2011 Last updated at 09:31 GMT Analysts believe more rate rises from the Indian central bank are likely India's inflation rate eased in April, but was still higher than expected as fuel and food prices remained high.

The main wholesale price index was up 8.66% in April from a year ago, but was less than the 9.04% rise seen in March.

Food prices in India remain extremely high. The cost of fruit has gone up by a third in the past year.

The figures comes as the government is expected to announce an increase in state-controlled prices of diesel and cooking gas.

Supporters of the main opposition party, the BJP, blocked roads and rail tracks in protests against a rise in state fuel prices.

But the Congress Party-led ruling coalition does not face new tests at the polls until early next year after last week's state elections, giving it the opportunity to raise fuel costs.

And state-run refiners raised petrol prices by 5 rupees (11 cents, 6 pence) a litre from Sunday, almost 9%, a record increase that is likely to fuel inflation in Asia's third-largest economy.

The Reserve Bank of India has raised interest rates nine times since March 2010 and economists expect it to do so again in June and July.

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