Plunge in Clothing Costs Slows U.K. Inflation Unexpectedly
(Bloomberg) -- U.K. inflation slowed unexpectedly in February as clothing and footwear prices fell at their sharpest pace for the month in more than 30 years.
Consumer prices rose 0.4% from a year earlier, which was less than the 0.7% gain the month before, the Office for National Statistics said Wednesday. Core inflation eased to 0.9% from 1.4% in January.
The figure was well below the Bank of England’s estimate for inflation and will feed debate about when monetary policy should be tightened. Officials predict a sharp rebound in the economy will drive consumer price gains to just below the central bank’s 2% goal by the end of this year.
This month’s data also give insights into how the economy is coping with a national coronavirus lockdown now into its third month. Non-essential shops, restaurants, bars and entertainment venues have been closed since the start of January, with some due to start reopening only in the middle of April.
Falling prices for clothing, second-hand cars, and games, toys and hobbies contributed to lower prices. Clothing prices normally rise in February after the conclusion of holiday sales, but this year discounting continued because of the pandemic interruption to usual shopping patterns.
Clothing and footwear prices fell 1.5% in February from January, the largest decline for the month since at least 1988 and the first drop since 2007.
That was partially offset by large pressure from the cost of diesel and gasoline as well as housing and household services. Prices rose 0.1% in February, slower than the 0.4% gain recorded in February 2020.
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“A big upward shift is still likely -- price gains are set to be more than a percentage point higher by April and above the Bank of England’s target by the end of the year. But the move will probably prove temporary, giving policy makers scope to stay focused on supporting the recovery.”
--Dan Hanson, Bloomberg Economics. Click for the full REACT.
Consumer optimism has picked up in recent weeks as Prime Minister Boris Johnson made swift headway in his effort to vaccinate almost all adults by the end of June. Chancellor of the Exchequer Rishi Sunak helped bolster sentiment by injecting a fresh jolt of spending in his annual budget, extending a tax break on house purchases and furlough payments to those out of work due to the virus.
BOE Chief Economist Andy Haldane has warned about inflation picking up already, saying a “tiger has been stirred” that may “prove difficult to tame.” The rest of the nine-member Monetary Policy Committee endorsed guidance that they won’t tighten policy until there’s more concrete evidence that inflation is returning to target in a sustainable way.
Private-sector economists see inflation temporarily breaching 2% by year end, but the Office for Budget Responsibility expects the rate to remain below target until the end of 2024 as a fragile labor market offsets the effect of higher oil prices. Chancellor Rishi Sunak’s budget decision to extend a reduced rate of value-added tax for the hospitality industry will also bear down on inflation this year.
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