–Petrol Prices to Provide Downward Drag
–Food May Partially Offset Energy Drag

LONDON (MNI) – UK CPI inflation is expected to moderate further in
June to a 3.1% annual rate, from the multi-month high scored in April,
due to a downward drag from petrol prices, as well as excess slack built
up in the economy after its sharp contraction.

MNI’s median forecasts for UK CPI inflation rates are 3.1% year on
year from 3.4% in May and 3.7% in April and flat month on month from the
0.2% seen in May.

Many City economists also believe that the inflation rate will
grind down toward 2.5% by the end of the year as the recent rise in
crude oil prices fades away.

Oil-price related base effects should become more favourable
barring a renewed sharp rise in oil prices over the coming months, said
Howard Archer, chief economist at IHS Global Insight.

The UK June Consumer Price Index will be released on Tuesday, July
13.

A copy of the UK June CPI was available during the most recent
meeting of the Bank of England’s (BOE) Monetary Policy Committee on July
7-8 at which the MPC decided to leave the UK base rate unchanged at its
record low of 0.50% where it’s been since March 2009.

BOE policy maker Andrew Sentance voted for a 25-basis-point rise at
the May meeting and has since sounded hawkish about the resilience of UK
CPI inflation.

A reading of 3.1% is still a percentage-point above the BOE’s 2%
target, but would ‘at least provide support to the central bank’s belief
that inflation will head down significantly over the coming months and
help it justify keeping interest rates down at 0.50%,” said Archer.

CPI has surprised on the upside, however, over the last six to
eight months and a stronger-than-expected CPI reading could make other
MPC members reassess the balance of risks between a possible slowing in
growth and still-high inflation, economists at JP Morgan said.

JP Morgan is looking for the June CPI rate to come in at 3.3%,
somewhat above the median. The Organization for Economic Co-operation
and Development (OECD) warned in late May that the UK needs to raise
interest rates in the latter half of 2010 to contain inflationary
pressures.

BOE governor Mervyn King has also expressed concern about
inflationary risks. But King has stuck to his belief that the rise in
the CPI annual inflation rate since autumn 2009 is largely due to
‘temporary’ factors like the reinstatement of the full VAT rate of 17.5%
and oil prices, which will fade away over time.

Those temporary factors have been ‘masking the downward pressure on
inflation,’ King has said. Many City economists echo King’s view.

Owen James at the Centre for Economic and Business Research
pointed to the third, and final, UK Q1 GDP estimate as a sign of excess
capacity in the economy. GDP was revised down in 2008, showing that UK
economic output actually fell 6.4% from 2008 to the third quarter of
2009 against a 6.2% prior estimate.

“The GDP number suggests that the peak to trough was deeper than
thought and suggests that there is more spare capacity that can be used
to absorb upside pressure,” James said.

“We’re looking for some trend-moderation in service sector
inflation,” said Philip Shaw, economist with Investec. “It’s very
difficult to discern, but we’re of the view that we’ll see a moderation
there.”

Goods-price inflation should also moderate over the coming year as
well, said Shaw. Goods price inflation stood at 3.4% in May, down from
3.5% the month previously. Economists concede that there is still a risk
that prices for seasonal food, clothing and footwear could rise in June,
offsetting the favourable energy base effect.

This is one reason why JP Morgan’s estimate is above consensus.
“This assumes the core CPI holds steady at 2.9%, with core goods prices
still showing monthly seasonally-adjusted gains,” says JP Morgan’s
Malcolm Barr.

The median forecast for Retail Price Index (RPI) for June is 4.9%
year on year, down from 5.1% prior, and 0.1% month on month against 0.4%
in May. Excluding mortgage interest payments, RPIX is estimated at an
annual rate of 4.9%, also down from 5.1% in the previous month.

–Tel: (+44 207 862 7481); email: stephanie.sprague@ntkn.com

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