Falling UK Inflation Gives BoE's Mark Carney 'Breathing Room'

UK consumer price inflation fell in August as air fares and petrol, diesel and clothing prices rose at a lesser pace than a year earlier.

The Office for National Statistics (ONS) said that consumer prices increased 2.7% year-on-year in August, compared with 2.8% in July, in line with economists' expectations.

Consumer prices increased 0.4% from the previous month, the smallest rise in the month of August since 2009.

Petrol prices rose by 2 pence per litre between July and August, compared to a larger 3.5 pence increase between the same two months in 2012.

Air fares rose by 9.4% between July and August, compared with 10.2% a year ago. In addition, the rise in clothing prices related to the autumn ranges was less than those seen in 2012.

That was partially offset by a faster pace of price rise in furniture, household equipment & maintenance categories.

These latest numbers continue the trend of broadly steady inflation seen since spring 2012, according to the ONS.

Meanwhile, inflation as measured by the retail price index increased to 3.3% in August from 3.1% in July.

Breather for Mark Carney

The Bank of England (BoE) Mark Carney has earlier said the central bank would keep the key interest rate at a record low of 0.5% until the country tackles its unemployment problem, bringing the jobless rate to 7%.

Nevertheless, a higher rate of inflation would have prevented the bank's plan.

Carney said earlier that he expects inflation to come down to the central bank's goal of 2% in about two years.

"Reduced price pressure provides the monetary policy committee a little more room to maintain loose policy and support growth. Carney has gained some breathing room for now, but with the economy picking up, it is unlikely inflation will remain subdued," said Sasha Nugent, Caxton FX analyst.

Consumer Prices Rising Faster than Wages

In the UK, wage growth is still lagging behind inflation, squeezing the budgets of households. Average weekly wages rose 1% in the three months to July compared with a year earlier, according to official data.

"With prices still rising much faster than wages the cost of living crisis under David Cameron continues," Labour's Cathy Jamieson MP said commenting on the data.

"After three damaging years of flatlining, working people are worse off by almost £1,500 a year under this Tory-led government. But rather than helping ordinary families David Cameron is so out of touch he has given a huge tax cut to millionaires instead."

Separately, the ONS said that input prices fell 0.2% in August from July. On a year-on-year basis, the rate of increase slowed to 2.8% in August from 5.1% last month.

August factory-gate prices rose 0.1% from July and 1.6% from a year earlier. Core output prices remained unchanged, compared to the previous month.

Furthermore, annual UK house-price inflation was 3.3% in July, compared to 3.1% in June. House prices increase by 9.7% in London.