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U.K. Inflation Rate Unchanged at Bank of England’s 2% Target

U.K. Inflation Rate Unchanged at Bank of England’s 2% Target

(Bloomberg) -- U.K. inflation held steady at the 2% target last month, leaving the Bank of England under no pressure to raise interest rates.

Downward influences from energy, accommodation and auto fuels were offset by food and clothing prices, as apparel stores discounted less aggressively than a year earlier, the Office for National Statistics said Wednesday. Core inflation ticked higher to 1.8%, as expected.

U.K. Inflation Rate Unchanged at Bank of England’s 2% Target

The lack of headline price pressures gives the central bank leeway to tolerate the fastest wage growth in more than a decade. With no-deal Brexit fears intensifying and global economic growth slowing, traders see a BOE rate cut as more likely than an increase.

Inflation averaged 2% in the second quarter, slightly less than the 2.1% predicted by the BOE in May. Policy makers see price growth easing further to about 1.6% by late 2019. Inflation in the services sector, seen as a proxy for domestically generated price pressures, eased to 2.5% in June.

Other figures showed pipeline pressures remaining subdued, with producer input prices falling 0.3% from a year earlier -- the first annual decline in three years. Output prices rose 1.6%, the least since September 2016. Both input and output prices fell on the month.

A key threat to the inflation outlook is the decline in the pound, which is now at its lowest level against the dollar in more than two years amid fears Britain could crash out of the European Union without a deal. A cheaper currency pushes up the price of imports.

What Bloomberg’s Economists Say...

“Domestic cost pressures are building, but are still short of the levels needed to return inflation to target sustainably. The main risk to our near term forecast comes from sterling. If the pound continues to weaken ahead of the Brexit deadline of Oct. 31, it will exert upward pressure on our projections.”

-Dan Hanson, economist
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House prices in England and Wales rose an annual 1.2% in May. In London, they fell 4.4%, the most since August 2009 when Britain was in the grip of the global financial crisis. Values in the capital fell 2.5% on the month to 457,471 pounds ($567,355) on average, their lowest level since the start of 2016.

The slump reflects concerns over Brexit and higher property taxes, though recent surveys point to signs of stabilization.

©2019 Bloomberg L.P.