British Consumer Price Inflation Unexpectedly Slows

LONDON — British consumer price inflation unexpectedly slowed in June, offering a temporary respite to the Bank of England while the sovereign debt crisis in Europe intensified.

The pace of consumer price increases slowed to 4.2 percent from 4.5 percent in May but remained well above the 2 percent Bank of England target, the Office for National Statistics said Tuesday.

The first drop in inflation in three months came as a surprise to some economists, who had expected higher food and commodity prices to continue to push overall prices up.

Slower inflation would reduce pressure on the Bank of England, which has kept interest rates at a record low of 0.5 percent to support a weak economic recovery even though inflation had continued to creep up well above its target.

The European Central Bank raised its interest rate to 1.5 percent last week to keep inflation in check.

Some economists warned that the inflation figures released Tuesday were just a temporary improvement, mainly due to stores starting to offer discounts early as consumer confidence floundered. Higher utility prices would probably still push inflation up to 5 percent this year, they warned.

“Most people were surprised by the figures,” Andrew Goodwin, an economist at Ernst Young in London, said. “Retailers are under so much pressure that they had to reduce prices early.”

The decline was led by clothing and items such as televisions, toys and computer games, the statistics office said. Retailers cut prices to lure consumers, who are putting off purchases amid concern about rising unemployment as a result of a wide-ranging government austerity program that started earlier this year.

Shares in the travel company Thomas Cook fell 28 percent Tuesday in London after it warned it would miss its profit forecast. Shares of Britain’s two largest supermarket chains, Tesco and J Sainsbury, also dropped.

The governor of the Bank of England, Mervyn A. King, said this month that factors responsible for higher inflation in the past, including a sales tax increase and higher commodity prices, would “not continue to push up the price level in the future” and that “inflation should fall back towards the target during the next two years.”

There are signs, however, that price increases could accelerate again. Centrica, Britain’s biggest energy supplier, said last week that it planned to raise gas and electricity prices by more than 15 percent as of August.

A drop in the euro against the pound could put pressure on the British economy, which probably grew just 0.1 percent in the second quarter from the first, according to the National Institute for Economic and Social Research.

Concerns this week that the sovereign debt crisis could spread to Italy weighed on the euro, making British exports to the euro zone more expensive and less competitive. The British government is relying partly on increasing exports to accelerate Britain’s economic recovery.

Article source: http://feeds.nytimes.com/click.phdo?i=e9165889910eb0b650f42acade5bace2