U.K. Inflation Rate Falls Most Since at Least 1997

By Svenja O’Donnell

Jan. 20 (Bloomberg) -- The U.K.’s inflation rate fell the most since at least 1997 in December as tax cuts and the deepening recession eased price pressures across the economy.

Consumer prices rose 3.1 percent from a year earlier, compared with 4.1 percent the previous month, the Office for National Statistics said today in London. That was still more than the median forecast of 2.6 percent in a Bloomberg News survey of 33 economists. On the month, prices fell 0.4 percent.

Inflation is slowing as Britain faces a recession that may be the worst since the aftermath of World War II. Prime Minister Gordon Brown’s government yesterday gave the Bank of England unprecedented powers to buy assets, which could be used as a tool to fight deflation, and unveiled its second rescue package for banks. The pound fell to a record against the yen today.

“In the next couple of months the consumer price index will come down very sharply indeed and it will allow the bank to cut rates,” said Trevor Williams, chief economist at Lloyds TSB Group Plc in London. “There will certainly be further easing. As interest rates approach zero, you have to put in place other measures to boost liquidity.”

The Bank of England this month cut its benchmark interest rate to 1.5 percent, the lowest since it was founded in 1694. Core inflation, which strips out costs of energy, alcohol, tobacco and food, slowed to 1.1 percent in December, the lowest since August 2006, the statistics office said.

Tax Cut

The pound was little changed at $1.4010 as of 10:30 a.m. in London, after dropping below $1.40 today for the first time since 2001. The currency reached an all-time low of 126.66 yen today and had the biggest drop against the euro in a month.

The government’s 2.5 percentage-point cut in value-added tax, part of a package to boost the economy, weighed down on inflation in December, the statistics office said. Two thirds of goods in stores carried through the reduction, as did most items on the Internet. The effect on services was less marked, officials said.

The only upward effect on consumer prices from a year earlier was from alcohol and tobacco, the statistics office said.

Stores reduced prices to boost flagging sales and attract shoppers in the holiday season. Ninety of Britain’s 100 largest retailers offered pre-Christmas discounts, according to PricewaterhouseCoopers LLP, with Tesco and Debenhams Plc reducing prices by up to 50 percent.

Energy Costs

Lower energy costs also weakened inflation. Oil prices have dropped by almost three-quarters since reaching a record $147 a barrel in July, easing pressure on prices. Tesco Plc, the U.K.’s biggest supermarket chain, on Dec. 31 lowered costs of gasoline and diesel fuel to help draw customers.

Deputy Governor John Gieve said last week that inflation will continue to slow this year as the economy endures its “sharpest fall in output for decades.”

The U.K. economy may contract 2.7 percent this year, the most since 1946, the Ernst & Young Item Club said yesterday. Data on Jan. 23 will show that the economy shrank 1.2 percent in the fourth quarter as Britain officially succumbed to a recession, according to the median of 33 forecasts in a Bloomberg news survey.

The Bank of England has cut the benchmark rate from 5 percent in Oct. to 1.5 percent this month. The Treasury said that the central bank can make asset purchases of up to 50 billion pounds ($74 billion) and the government will indemnify the purchases against any losses in the facility, which will start on Feb. 2.

To contact the reporter on this story: Svenja O’Donnell in London at sodonnell@bloomberg.net.