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Inflation rises unexpectedly

LONDON (Reuters) - Inflation unexpectedly rose in July, damaging hopes that easing price pressures would allow Britons to help the recession-hit economy with higher spending, but leaving expectations for more central bank stimulus intact for now.

Consumer price inflation inched up to 2.6 percent from 2.4 percent in June as prices for airfares soared and clothing retailers reined in seasonal discounts, the Office for National Statistics said on Tuesday, confounding economists' forecasts for a fall and posting the first rise since March.

Last week, the Bank of England slashed its inflation forecast, seeing inflation nearly back at its 2-percent target by the end of this year.

Analysts said the July figures were bucking a broader trend.

"We really need to take the June and July figures together and this implies that the downward trend in prices remains in place," James Knightley, an economist at ING, said.

"The rise in oil prices and food commodities presents some risks for headline inflation in coming months, but with the weak economy implying only limited corporate pricing power we still expect inflation to fall below 2 percent by the end of the year," he added.

UK bond futures briefly fell on the news and the pound rose to a 2-week high against the dollar.

The ONS said that airfares jumped 21.7 percent on the month, the largest rise from June to July since 2004.

The monthly fall in clothing and footwear prices was the smallest June to July drop since records started in 1996 as retailers had started seasonal discounts in June due to unusually wet weather.

DISAPPOINTING

A fall in inflation is seen as a crucial ingredient for a recovery from the recession the economy tipped into around the turn of the year.

"Inflation has halved since its peak in September but any increase is disappointing," a finance ministry spokesman said. "The government knows how tough things are for families at the moment."

Many Britons have experienced the worst squeeze in living standards in over 30 years and scaled back spending as higher taxes and rising prices have eaten up meagre wage increases.

Inflation has fallen sharply from the three-year peak of 5.2 percent hit in September 2011, and June's fall had been much sharper than expected, driven in part by the early summer sales.

The ONS said the fall in clothes prices between May and July was overall similar to previous years.

The central bank predicts a further fall to around 1.7 percent in two years time, indicating that it had room to add more stimulus once the current programme to buy 50 billion pounds of government bonds ends in November.

Core consumer price inflation, which strips out volatile components such as food and fuel, also rose to 2.3 percent from 2.1 percent, casting further doubt on whether inflation will fall much further.

In a separate release the ONS said house prices in Britain rose by 2.3 percent on the year in June, the same as in May, driven by a 6.5 percent annual house price increase in London.

However, a survey by the Royal Institution of Chartered Surveyors showed on Tuesday that British house prices experienced their most widespread falls for a year in the three months to July, and surveyors do not expect the outlook to improve over the next 12 months.

(Editing by Jeremy Gaunt.)

Source: http://news.yahoo.com/instant-view-inflation-picks-unexpectedly-july-091238355--business.html

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