UK inflation rate unchanged at 1.8 percent in July
LONDON - LONDON (AP) — Britain's inflation rate held steady at 1.8 percent in July, surprising economists who had forecast a further fall, as the rising cost of computer games, DVDs and alcohol balanced out falling food prices.
The figures out Tuesday from the Office for National Statistics suggested that fears about damaging deflation as the domestic recession eases could be overplayed.
However, most analysts said that they still expect consumer prices to fall further below the Bank of England's 2 percent target in the coming months as an oversupply of goods and services and weaker demand takes hold.
Along with the steady rate in the annualised Consumer Price Index, the Office for National Statistics reported that the Retail Prices Index, which includes mortgage interest payments, rose unexpectedly to minus 1.4 percent, from minus 1.6 percent.
Consumer price inflation has been on a downward trend since peaking at 5.2 percent a year ago, but it has not fallen as quickly as forecast in recent months due to a weak pound.
The Statistics Office said that price rises in the recreation and culture segment of the economy — encompassing toys, computer games and DVDs — had supported inflationary pressures.
Motoring costs, including vehicle purchases, car tax and insurance, also contributed.
That was offset by continuing falls for food and non-alcoholic beverages as prices of meat and vegetables dropped this year compared to last year's hikes.
There was also a large downward contribution from gas and oil, reflecting the fall in crude oil prices from last July's peak of $147 a barrel. Crude oil is currently trading at around $67.
Asked about the figures, Treasury Chief Alistair Darling noted that Bank of England governor Mervyn King made it clear last week that he expects inflation will continue to fall.
"Obviously the figures will change from month to month," said Darling, adding that he expects Britain to return to economic growth at the turn of the year.
The Bank of England is tasked with keeping inflation at 2 percent to maintain price stability, and, in turn, economic stability.
King warned last week that he expects to have to write a mandatory letter of explanation to Chancellor Alistair Darling later this year detailing why inflation was more than a percentage point below target.
Vicky Redwood, an economist at Capital Economics, noted that inflation had been slower to fall in Britain than in other major economies.
"We expect that this halt in the downward trend in inflation will prove to be only temporary," she said. "These figures do little to alter our view that a prolonged period of low inflation or even deflation remains a serious risk."
Deflation, which occurs when the annual inflation rate falls below zero, is considered dangerous for its potential spiral effect — consumers put off purchases as they wait for prices to fall further, which reduces overall economic activity and investment. That in turn leads to further falls in demand.
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