UK annual CPI inflation slumps to 1.9 pct in July

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UK annual CPI inflation slumps to 1.9 pct in July

Inflation in the UK fell by the biggest amount in over five years during July, pushed down by falls in
food prices and furniture, as well as utility and petrol costs and taking the key CPI rate below the
Bank of England s target rate, official figures showed.

The Office for National Statistics said the annual CPI inflation rate slumped to 1.9 pct in July from 2.4 pct in June, well below analysts forecasts for a decline to 2.2 pct and the steepest drop since May
2002.

This is the lowest CPI rate since March 2006 and is also the first time since that date that inflation
has been below the 2.0 pct level that the Bank of England is charged with targeting.

The news is likely to diminish expectations for a further interest rate rise in the autumn, particularly
in the light of the recent turmoil on financial markets.

In its latest quarterly inflation report released last week, the BoE said it expects inflation to fall back during the second half of the year and settle around the 2.0 pct target. This assumes that interest
rates follow market expectations for one more quarter point rise to take the main repo rate to 6.0
pct.

Rising inflationary pressures have caused the central bank to raise interest rates five times in the last year, taking the repo rate to its current level of 5.75 pct.

The statistics office said the biggest downward effects on the CPI rate came from food prices, as
supermarkets led price cuts across a range of products, including bread and cereals, meat, fish, fruit and vegetables, as well as a record monthly fall in furniture prices.

There were further downward effects from drops in petrol prices and utility bills, as well as price
reductions in digital camcorders, personal computers, recording media and theatre admissions.

The only large upward effect came from clothing and footwear, with the effect of summer sales
being smaller than the same time a year ago, the ONS said.

On a month-on-month basis, CPI was down by 0.6 pct following a rise of 0.2 pct in June, below
expectations for a 0.2 pct decline and the sharpest fall since January of this year.

Today's data also showed the underlying or core CPI measure -- which excludes energy, food,
alcoholic beverages and tobacco -- fell to 1.7 pct in July from 2.0 pct in June. Analysts had expected the rate to remain at 2.0 pct.

Compared with June, core CPI fell by 0.5 pct, following a 0.2 pct increase in June.

Elsewhere in today s release, the statistics office said the annual RPI rate of inflation, which is used
in pensions payments and often used in pay negotiations, fell to 3.8 pct from 4.4 pct in June, the
lowest since October 2006 and the sharpest fall since November 2001.

Analysts had forecast a much more moderate dip to 4.3 pct.

On a monthly basis, RPI inflation was down 0.6 pct, following a 0.5 pct rise in June, against forecasts for a smaller 0.1 pct fall.

Meanwhile, the RPIX measure, which excludes mortgage payments, was up 2.7 pct year-on-year
after a 3.3 pct increase in June, the smallest since April 2006. This is the biggest decline in the index since April 1991.

The annual RPIX measure, however, remains above the 2.5 pct annual rate that the BoE was
previously charged with targeting and has been above that level since May 2006.

On a monthly basis, RPIX was down by 0.6 pct in July after a 0.4 pct rise in June.

Looking ahead, the ONS noted upside pressures to food prices over the coming months.

Noting that CPI and RPI inflation tend to behave similarly to food prices in August, the ONS said
higher wheat tariffs appear to be forcing animal feed prices higher, in turn pushing up poultry and
livestock prices. Bread and milk prices are also expected to rise.

Meanwhile, the recent flooding in the UK is seen to be reducing stocks of seasonal vegetables,
notably for the Christmas shopping season, with brussels sprouts, carrots and peas among those hit.

Other seasonal trends are for rises in clothing and footwear, and furniture, which tend to recover
from earlier months sales, while air fares tend to rise in August.

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