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Inflation falls on food price war Inflation falls on food price war
(about 1 hour later)
A supermarket price war helped the UK's rate of inflation to fall to 1.9% in July, well below analysts' forecasts. Weaker food prices helped the UK's rate of inflation to fall below analysts' forecasts to 1.9% in July.
The Consumer Price Index dropped sharply from June's level of 2.4%, raising hopes that further rises in interest rates will not be needed. The Consumer Price Index (CPI) dropped sharply from June's level of 2.4%, raising hopes that further rises in interest rates will not be needed.
It is the first time UK inflation has fallen below the government's target of 2% since March 2006. It is the first time UK inflation has fallen below the government's target of 2% since March last year.
The Retail Price Index, a measure often used in wage bargaining, fell to 3.8% in July from 4.4% the previous month.The Retail Price Index, a measure often used in wage bargaining, fell to 3.8% in July from 4.4% the previous month.
Interest rate peak?
"This is a massive surprise," said Howard Archer, chief UK and European economist at Global Insight."This is a massive surprise," said Howard Archer, chief UK and European economist at Global Insight.
"Consumer price inflation fell back far more than anyone was expecting in July, including, we strongly suspect, the Bank of England."Consumer price inflation fell back far more than anyone was expecting in July, including, we strongly suspect, the Bank of England.
"This will boost expectations that interest rates have peaked at 5.75%, especially as the current turmoil in global credit and financial markets further dilutes the case for higher interest rates, for now at least.""This will boost expectations that interest rates have peaked at 5.75%, especially as the current turmoil in global credit and financial markets further dilutes the case for higher interest rates, for now at least."
The news caused the pound to fall below the $2 level, where it has been trading recently. Interest rate peak?
Speculators considered the possibility that the Bank of England would reconsider raising interest rates one more time to rein in inflation, as it had previously suggested it might. The inflation figures come on the same day as a report from the Royal Institution of Chartered Surveyors (RICS), indicating that the number of people looking to buy a house for the first time fell at its fastest rate in three years.
Higher interest rates give currency investors better income and vice versa. At 0840 GMT, one pound traded at $1.999, down from $2.008 before the data was released. The Bank of England has raised UK interest rates five times since August last year. It suggested last week in its Quarterly Inflation Report that one more rise would be needed to rein in inflation.
But the greater-than-expected drop in the monthly figure prompted currency speculators to consider the possibility that the Bank's Monetary Policy Committee (MPC) could now halt rates at 5.75%.
This triggered a sell-off in sterling, which dipped below the $2 level.
Higher interest rates are attractive to currency investors, who will buy into currencies that provide a higher income.
At 0840 GMT, one pound traded at $1.999, down from $2.008 before the data was released.
"Although the MPC focuses on future inflation rather than today's rate, the fact that CPI has come in well below their expectations must put some question mark over a move to 6% interest rates," observed Ian Kernohan, an economist at Royal London Asset Management.
Flood costs
The lower cost of food - from bread and cereals to meat, fish and fruit - was the biggest contributor to the surprise fall in consumer price inflation as supermarkets slashed prices to compete for market share.
Heavy discounting by furniture retailers seeking to attract customers into stores during the wettest July on record also helped push inflation below the government's key 2% mark, as did lower energy bills.
But the Office of National Statistics cautioned that the heavy summer rain across the UK would cause supermarket shortages in the run-up to Christmas and could push up the prices of food, particularly vegetables and milk.
"Food prices look set to rebound sharply due to flooding, while the Bank of England continues to believe that corporate pricing power remains firm," said James Knightley, an economist at ING.
"Overall, though, coupled with the recent market volatility, our September rate hike view looks a lot less likely."