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UK inflation plunges to 1.5 per cent while house prices soar


06-18-2014

 

Rebecca Jones


UK inflation plunges to 1.5 per cent while house prices soar

UK inflation plunges to 1.5 per cent while house prices soar

The consumer price index (CPI), which is used to measure UK inflation, grew by 1.5 per cent in the year to May 2014, down from 1.8 per cent in the year to April.

This was more than the 0.1 per cent decline expected by markets, prompting a 0.15 per cent dip in the value of sterling to $1.69 against the US dollar immediately after the announcement was made by the Office for National Statistics (ONS) on Tuesday.

Sterling against the euro also fell slightly before rising to 1.2524.

The cost of transport, which declined 0.17 per cent in the year to May, was the biggest driver behind the slide as the 0.40 per cent rise in prices seen during April as a result of the Easter holiday reversed.

However, while this was largely expected, the cost of food and non-alcoholic beverages, clothing and footwear, furniture and household goods and communication also fell by 0.13 per cent, 0.09 per cent and 0.03 per cent respectively, driving inflation lower than anticipated.

Upward drivers include recreation and culture, the cost of which rose 0.1 per cent in the year to May compared to a fall of 0.02 per cent in the year to April as well as alcohol and tobacco which increased in cost by 0.05 per cent, again compared to a decline in the year to April.

CPIH, which is a measure of UK consumer price inflation that includes owner occupiers' housing costs, also fell to 1.4 per cent compared to 1.6 per cent in April.

Commenting on the figures, Trevor Welsh, head of UK sovereign and inflation at Aviva Investors, says: '[The decline] has been primarily caused by the timing of Easter and the supermarket price war, which resulted in food and seasonal food prices falling sharply.

'However, this may be the bottom of the cycle and the market is already becoming more concerned about the tension in the Middle East and the possible impact on oil prices. As such, any downward move in inflation expectations has been muted so far.'

house prices rise

In a separate statement released today the ONS reports that UK house prices increased by 9.9 per cent in the year to end April 2014, up from 8.0 per cent in the year to March 2014. This was driven largely by price rises in London and the South East where houses surged in value by 18.7 per cent and 8.9 per cent respectively.

Governor of the Bank of England (BoE) Mark Carney warned last month that a housing bubble was the greatest threat to the UK economic recovery, adding last week that interest rates could rise 'sooner than markets expect', which could curb soaring house prices.

However, today's CPI figure could prompt a change in direction as rising interest rates would likely depress inflation further, warns Kathleen Brooks, research director at Forex.com.

'How can the Bank prep the market for a rate rise if inflation is falling well below the target rate [of 2 per cent]? Luckily for Carney the ONS has his back. It noted that the timing of Easter in April is "likely" to have had an impact on the index.

'The lack of price pressure in the UK economy may not worry the BoE; after all the Bank ignored rates staying above target from 2009 until late 2013, so why wouldn't they raise rates when prices are below target?'

www.moneyobserver.com

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