British consumer price inflation eased more than expected in September to hit its lowest annual rate in five years after a much smaller move in energy prices this year than a year ago, official data showed today.
The Office for National Statistics said prices were unchanged between August and September, the weakest September reading on record, allowing the annual rate to fall to 1.1 per cent, the lowest since September 2004 and below analysts' forecasts for an easing to 1.3 per cent.
Inflation has been falling in recent months and is now well below the Bank of England's 2 per cent target. If the rate of inflation falls below 1 percent, BoE Governor Mervyn King will have to write a letter of explanation to the government.
The pound fell nearly half a cent against the US dollar, hitting a five month low at $1.5722, and touched a 6-1/2 month low against the euro as investors bet monetary policy would remain loose for longer.
However, analysts were sceptical inflation would fall much further, if at all.
"This is only a temporary move lower. Clothing prices and petrol prices jumped and we suspect that these components have further to rise," said James Knightley, economist at ING.
A planned rise in value-added tax to take effect on January 1st would propel inflation higher early next year, as would rising oil prices and the weaker pound, he added.
A trio of surveys released earlier today showed Britain's unprecedented monetary and fiscal stimulus has helped reverse a slide in house prices, buoyed retail sales and pushed the economy closer to recovery.
The British Retail Consortium said retail sales rose at their fastest annual pace in five months in September. But it cautioned the rise was skewed by base effects, following a slump in sales in the wake of Lehman Brothers' collapse last year, and the timing of the August bank holiday.
Figures from the British Chambers of Commerce showed the decline in Britain's manufacturing and services sectors eased markedly in the third quarter, while a survey from the Royal Institution of Chartered Surveyors suggested house prices are rising at their fastest pace since the credit crunch began more than two years ago.
Economists had been expecting Britain to return to growth in the July-September period after more than a year in recession. However, such hopes took a knock last week after data showed a 2.5 per cent drop in industrial output in August and policymakers are wary of false dawns.
The BRC said the value of like-for-like sales rose 2.8 per cent in September compared with a year ago, the biggest rise since April, when sales were bolstered by Easter.
The value of total sales - which includes new floorspace - was 4.9 per cent higher than a year ago, also the biggest rise since April.
"But we mustn't get carried away. They are compared with a weak performance last September," said BRC Director General Stephen Robertson. "Consumer sentiment is volatile and could weaken again."
The Royal Institution of Chartered Surveyors said 22 per cent more surveyors reported price rises in the last three months than price falls, the highest since May 2007, before money markets froze and sent the world's financial system to the brink of collapse.
The findings tally with surveys from mortgage lenders which show that a combination of record low interest rates and tight supply are helping property prices reverse some of last year's hefty losses.
Figures from the Halifax last week showed prices have risen almost 6 per cent since April. However, they are still nearly 5 per cent lower than in September last year and economists have warned that the recovery could easily go into reverse should interest rates rise. In its quarterly survey of 5,500 firms, the British Chambers of Commerce said the pace of decline in domestic sales and orders was its slowest in more than a year.
The improvement in the survey was broad-based with almost all components returning to levels last seen before the collapse of US bank Lehman Brothers last year triggered a global economic crisis.
However, the lobby group warned that conditions remained fragile and that after news last week of an unexpectedly sharp fall in industrial output in August, the economy likely stagnated or even continued to shrink in the third quarter.
"The Q3 results support our assessment that the UK economy is on the brink of leaving recession. However, the improvement is not sufficiently strong to allow us to conclude without doubt that GDP has already returned to positive growth," said BCC chief economic adviser David Kern.
Reuters