Inflation falls below BoE's target

Inflation in Britain fell below the Bank of England's two percent target for the first time in almost two years in June, helped by food prices which eased after surprising stickiness earlier in the year.

Figures from the Office for National Statistics showed consumer prices rose 0.3 percent last month. That took the annual rate to 1.8 percent, the lowest since September 2007, from 2.2 percent in May.

The broader measure of retail price inflation, which includes housing costs, fell an annual 1.6 percent, its sharpest drop since records began in 1948.

Analysts predict inflation will fall further in the coming months as the recession erodes pricing power, giving policymakers more scope for stimulus.

"June's consumer price figures should help ease concerns that inflation is proving to be significantly more stubborn in the UK than in some other countries," said Jonathan Loynes at Capital Economics.

"With inflation set to fall further, there is no urgency for policymakers to start to tighten policy conditions to keep price pressures under control."

Incoming Monetary Policy Committee member Adam Posen gave a strong defence of the Bank's quantitative easing programme and said he was more worried about undershooting the inflation target than overshooting it.

"The risks clearly are more about deflation than inflation in the short term," Posen told lawmakers.

FURTHER FALLS AHEAD

Despite the sharpest economic contraction in more than 50 years, inflation has been slower to fall in Britain than in many of its trading partners.

Prior to June, consumer price inflation had been above the central bank's 2 percent target since October 2007, having peaked at a record 5.2 percent last September.

In the United States and many euro zone countries, CPI inflation has turned negative.

"For once, inflation is in line with expectations and not overshooting so that's encouraging," said Ross Walker, UK economist at RBS.

While that fall is likely to be welcomed by the Bank of England, inflation remains higher than it forecast in May.

The BoE will publish new growth and inflation forecasts in August which will be key to its decision on whether to inject more stimulus into the economy.

The central bank shocked markets last week by keeping its asset purchase target unchanged at £125 billion and scaling down the pace at which it pumps money into the economy via purchases of gilts.

"The June inflation data broadly reinforce our belief that the Bank of England can afford to keep interest rates down at 0.50 percent well into 2010," said Howard Archer at Global Insight.

"The data also do little to dilute our belief that the Bank could very well increase its Quantitative Easing programme in August despite its inaction at its July MPC meeting."

A breakdown of the CPI data by component showed the biggest downward effect came from food and non-alcoholic drink prices which fell last month but rose in the same month last year.

Meat, bread, fruit, vegetables and dairy products all contributed. There was also downward pressure from furniture prices which rose less than last year.

One upward pressure on the index came from the price of computer games which rose by more than a year ago.

- Reuters