Inflation plunge highlights weakness in British economy
Published 13/07/2011 | 05:00
Amount Britain's consumer price inflation fell by in June
British inflation fell unexpectedly last month and the trade gap widened, pointing to more weakness in the economy and providing support to those in the Bank of England who want to keep interest rates at a record low.
Since the release of weak industrial output and construction data last week, economists have increasingly predicted very low growth or even contraction for the second quarter of 2011.
Yesterday's trade and inflation data points to poor consumer demand for non-essentials and a failure of exports to keep pace with rising imports.
Figures released yesterday, which show falling house prices and sluggish retail sales growth, only strengthened this outlook.
The office for national statistics in Britain said consumer price inflation fell to 4.2pc in June from a two-and-a-half year high of 4.5pc in May, after the first drop in prices for the month of June since 2003.
Sterling fell and gilt futures extended gains after the inflation and trade numbers, as investors pushed expectations of a first post-financial crisis increase in interest rates towards the end of next year.
The figures are likely to bring some reassurance to BoE governor Mervyn King, who has said repeatedly that the factors behind soaring prices are likely to be temporary, and warned on Monday that attempts to bring inflation down quickly could harm the British economy.
Discounting of video games and other consumer electronics helped drive the fall, suggesting retailers are responding to weak demand. Mobile phone charges and insurance premiums also rose slower and the core rate of CPI -- which excludes rising fuel and food prices -- eased to 2.8pc, its lowest since November 2010.
"This might be the first real sign that the weakness of households' spending power is starting to bear down on underlying price pressures in the high street," said Jonathan Loynes of Capital Economics.
British consumers are scaling back spending as soaring prices, higher taxes and slow wage growth hit their budgets.
Europe's second-biggest travel firm Thomas Cook warned yesterday its full year profit would be lower than expected.