U.K. inflation falls back to zero

-Inflation in the U.K. edged down to zero again in June, official figures showed Tuesday, highlighting price weakness is still a concern for central banks around the world.

Consumer prices remained flat during the period, the Office for National Statistics said, compared with 0.1% growth in May. This is a fresh sign inflation in Britain remains subdued, after turning negative in April for the first time since 1960, according to historical estimates.

The start of the summer season helped drag down inflation, the ONS said, due to discounts in clothing and footwear. And air fares, which climb during holidays, rose at a slower pace than a year ago.

Nevertheless, a large part of the slowdown was due to a drop in the cost of commodities, chiefly food. Oil prices also took a dip, despite signs they had started to recover from January’s 6-year low. The prices of goods bought and sold by U.K. manufacturers, which are heavily influenced by the cost of crude, registered strong annual falls in June, official statistics showed.

Weaker inflation is a global phenomenon and the drag of cheaper commodities has been felt all across developed economies. Prices in the eurozone rose 0.2% in June, preliminary official data show, compared with 0.3% in May. Before that, prices in the 19-nation bloc had registered negative or no growth for five months in a row. Falls in prices are usually a concern for policymakers, because they can lead to households delaying spending.

Regardless, inflation is still broadly consistent with what the Bank of England is expecting. The U.K.’s central bank has repeatedly stated its confidence that consumer prices will climb faster during the next couple of years, reaching 2% annual growth–the BOE’s medium-term target–in the second quarter of 2017.

Most surveys suggest Britons are feeling increasingly upbeat about the economy, as the effects of May’s general election are left behind. Pay settlements for British workers are also rising at a healthy pace, a telltale that employers are unconcerned about deflation as well.

The fact inflation remains subdued, however, provides some more strength to monetary doves. In the last few years, central banks have taken a center-stage role in stimulating the economies of western nations, which were badly hit by the recession and high levels of debt. In the single currency area, the European Central Bank fired up in January a scheme to stimulate the economy and stoke inflation through the purchase of sovereign bonds, a program which is set to continue until prices show strong signs of picking up.

In the U.K., Bank of England officials voted last week to keep interest rates unchanged at their current record low of 0.5%. Although minutes from the central bank’s sessions show some members of its rate-setting body increasingly lean towards a rate rise, weak prices are likely to muffle hawkish voices in the near term.

Investors currently expect the Bank of England to start gradually rising interest rates in mid-2016.

source:Market Watch