LONDON, Sept 15 - Inflation in Britain is likely to have been steady in August as the impact of a slowdown in house prices and cheaper clothes countered a rise in petrol and food prices. And that is likely to leave room for the Bank of England to keep interest rates low in the coming months despite signs of economic recovery, analysts said.
Economists polled by predicted on average that retail price inflation, excluding the cost of home loans, or RPIX, remained at an annual 2.9 percent in August -- unchanged from the previous month. The 14 economists in the survey predicted on average that headline RPI inflation probably fell to 3.0 percent from 3.1 percent in the previous month. The Harmonised Index of Consumer Prices (HICP), which will replace RPIX as the targeted measure in November, is forecast to stand at 1.3 percent in August, unchanged from July. "The data should support our view that current market rate expectations are far too pessimistic," said Jonathan Loynes, chief UK economist at Capital Economics, referring to the interest rate futures market which has priced in a possible rise by the end of this year. Petrol prices rose around 1.8 percent in August, enough to add about 0.1 percent to the overall inflation rate. Seasonal food prices are also expected to have crept up because of a heatwave during the month. Prices of footwear and clothing, on the other hand, are expected to have fallen following a strong rise in the previous month.
SUMMER SALES
Encouraged by the weather-related strength of sales in June and early July, clothing retailers have cut prices by much less than usual in the summer sales. However, surveys indicated that clothing retailers had a much tougher time in August as hot weather turned from a boost to a drag by deterring shoppers and dampening demand for autumn ranges. "The downward impact should come from the clothing sector. We believe there was less price recovery in August," said Alan Castle, economist at Lehman Brothers. The housing market should also help to offset the rising oil prices. Although house prices have shown some resurgence recently, their contribution to inflation should be relatively mild given that prices rose much less than a year ago.
Data from the Nationwide Building Society showed house prices rose 1.1 percent on the month in August -- their fastest rate in three months. However, that still pulled the annual rate of increase down to 16.6 percent from 17.9 percent. Although this will be the 10th month in a row that retail price inflation has been above the government-set target of 2.5 percent, few economists expect the central bank's Monetary Policy Committee (MPC) to raise interest rates soon. "I don't think the MPC will read too much into these numbers. We don't buy the argument that the MPC is going to be looking to raise interest rates anytime soon, especially as we are going to shift into HICP," said Adam Chester, chief UK economist at Halifax. "On the balance, we believe the BoE will keep interest rates steady for a while." Some analysts believe a shift to the HICP measure would imply looser monetary policy. The main reason for the current large divergence between the two inflation measures is that HICP does not include local taxes and housing costs, which until recently had pushed up the existing British measure. The BoE left interest rates on hold earlier this month after shaving them by 25 basis points to a 48-year low of 3.5 percent in July.///