U.K. Inflation Rate Falls to Lowest Since 2016 on Clothes
An employee pushes a rail of clothing stock at a clothing store in London, U.K. (Photographer: Luke MacGregor/Bloomberg)

U.K. Inflation Rate Falls to Lowest Since 2016 on Clothes

(Bloomberg) --

U.K. inflation fell to its lowest rate since the end of 2016, driven down by the price of computer games and clothing.

Consumer prices rose 1.7% in August from a year earlier, down from 2.1% in July and well below the Bank of England’s 2% target, Office for National Statistics figures published Wednesday show. Core inflation slowed to 1.5%.

U.K. Inflation Rate Falls to Lowest Since 2016 on Clothes

The lack of inflation pressure leaves BOE officials free to keep interest rates on hold, with the central bank currently expecting price growth to remain below target until the end of 2020. After the data were released, bond yields fell and sterling declined.

However, there are signs that pressures are building in a tight labor market -- wages are now rising at their fastest pace since 2008 -- and a weaker pound threatens to push up import prices.

Inflation could rebound this month amid higher fuel prices after an attack on Saudi Arabian oil facilities knocked out about 5% of global supply. Brent crude remains 7% higher than its pre-attack levels following a roller-coaster few days on the markets.

The BOE forecasts also assume that Britain leaves the European Union with a deal in place to cushion the economic blow. A no-deal Brexit would see inflation surge as sterling falls and tariffs are introduced, presenting officials with a sharp policy dilemma.

The 0.4 percentage-point drop in the inflation rate last month was the largest since 2014.

Downward pressure came from computer games, toys and hobbies, which plunged 5% on the month after rising in July. Clothing and footwear prices rose less than they did a year earlier after the end of summer sales.

Inflation in the services sector, seen as a proxy for domestically generated price pressures, dropped to a 16-month low of 2.2%.

Other figures showed pipeline pressures remained subdued, with input prices falling 0.8% from a year earlier and output prices gaining just 1.6%. The figures partly reflect a fall in oil prices during August, an effect that will be more than reversed this month.

House prices in England and Wales rose an annual 0.7% in July, the least since 2012. Values fell in four out of nine English regions, with the northeast posting a 2.9% decline.

London fell 1.4%, as concerns over Brexit and higher property taxes continued to weigh on the British capital.

©2019 Bloomberg L.P.

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