October 17, 2018 / 8:38 AM / a month ago

Relief for UK consumers as inflation drops more than expected

LONDON (Reuters) - British inflation fell more than expected in September to a three-month low, offering some relief to consumers who have been squeezed financially since the Brexit vote.

Consumer prices rose at an annual rate of 2.4 percent, more than reversing August’s jump to a six-month high of 2.7 percent, the Office for National Statistics said.

That was well below the consensus forecast of 2.6 percent in a Reuters poll of economists.

Sterling fell against the dollar and euro while British government bond prices rose.

The figures are likely to reassure Bank of England officials who forecast in August that inflation would average around 2.5 percent over the July-September quarter.

“Coupled with the gradual up-tick in wages, the slowing rise in prices will deliver a boost to consumers’ real take-home pay packets, which will also be welcome news for retailers,” said Tej Parikh, senior economist at the Institute of Directors.

“The Bank of England will be unruffled by this week’s data releases, and remains unlikely to budge on interest rates as it continues to monitor the impact of Brexit developments.”

The BoE expects it will need to raise interest rates gradually in response to rising wages, assuming Britain manages to strike a deal with the European Union to smooth its exit from the bloc.

On Tuesday, the ONS said the basic wages of workers had risen at their fastest pace in nearly a decade over the summer months. But wage growth of 3.1 percent remains meager by historical standards when adjusted for inflation.

The BoE expects inflation to drift down but stay just above its 2 percent target in two years’ time as it gradually raises borrowing costs.

Consumer price inflation hit a five-year high of 3.1 percent in November, when the inflationary effect of the pound’s tumble after the Brexit vote in June 2016 reached its peak.

MEAT AND CHOCOLATE

The ONS said food prices, particularly of meat and chocolate, represented the biggest drag on September’s inflation rate. Ferry prices dropped from a “surprisingly high” summer peak.

Still, there could be more short-term pressure in the pipeline for consumer prices.

For manufacturers, the cost of raw materials - many of them imported - was 10.3 percent higher than in September 2017, up from a revised 9.4 percent in August.

FILE PHOTO: A shopper carries a basket in a supermarket in London, Britain April 11, 2017. REUTERS/Neil Hall/File Photo

That was a bigger jump than any economist had forecast in the Reuters poll, which anticipated a rise of 9.2 percent.

Manufacturers increased the prices they charged by 3.1 percent compared with 2.9 percent in August, again stronger than all forecasts in the poll, which had pointed to a 2.9 percent increase.

The ONS said house prices in August rose by an annual 3.2 percent across the United Kingdom as a whole, the smallest rise since August 2013 and compared with a 3.4 percent increase in July. Prices in London alone slipped 0.2 percent.

Editing by Andrew Roche

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