UK inflation drops to 3.2% in June

Falling petrol prices pushed British inflation down for a second month running in June, but underlying pressures rose and inflation…

Falling petrol prices pushed British inflation down for a second month running in June, but underlying pressures rose and inflation over the quarter was higher than the Bank of England's latest forecast.

The Office for National Statistics said annual consumer price inflation fell to 3.2 per cent from May's 3.4 per cent after prices rose 0.1 per cent on the month, as economists expected.

However, the older retail price measure of inflation fell less than expected as core CPI inflation - which excludes energy and food prices - unexpectedly rose.

"The obvious surprise was the rise in the core rate, which serves to underline this theme of price stickiness," said Ross Walker, UK economist at RBS. "Clearly it's not falling as much as we'd hoped and it's not making the BoE's job any easier."

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During the second quarter, headline consumer price inflation averaged 3.5 per cent, above the 3.3 per cent predicted by the central bank in its May Inflation Report.

Gilts fell and sterling rose as investors sensed more BoE policymakers may be persuaded to join rate-rise advocate Andrew Sentance if underlying inflation does not resume a downward path.

Consumer price inflation hit a 17-month high of 3.7 per cent in April, prompting concern that slack in the economy was failing to bear down on inflation to the degree expected.

BoE governor Mervyn King remains convinced inflation will ease back towards its 2 per cent target over the course of the year once past rises in oil prices and January's VAT rise fall out of the annual comparison, but recent BoE policy meetings have seen heated debates.

A breakdown of the figures showed weaker transport costs, notably a reduction in petrol prices, knocked 0.17 percentage points off the annual rate of CPI. A record June monthly fall in clothing prices also helped reduce annual CPI by 0.05 percentage points.

However, insurance premiums and airfares rose and core CPI inflation rose to 3.1 per cent from 2.9 per cent, its joint highest rate since records began in 1997.

The retail price inflation gauge fell to 5.0 per cent from 5.1 per cent, a smaller drop than the fall to 4.9 per cent analysts had expected.

The ONS blamed the stickiness of the RPI measure on the greater weight of insurance and housing costs in the index.

Reuters