U.K. CPI slows to annual rate of 1.8% in June, falling below the official target of 2% for the first time in 20 months

LONDON , July 14, 2009 () – Britain's inflation rate slowed to an annual rate of 1.8 percent in June, at last falling below the official target for the first time in 20 months, official data showed Tuesday.

It was the lowest level for the consumer price index since September 2007, when it was last below the government 2 percent target. The CPI rate has fallen every month except once since September's inflation peak of 5.2 percent.

Sliding food prices, particularly for meat, milk and fruit, were the main factor behind the fall in June. A year earlier, food costs were rising sharply, the Office for National Statistics said.

"This is no one-off," said Jonathan Loynes, chief European economist at Capital Economics. Given the recent drop in wholesale food prices and lower import prices, "further falls in food CPI inflation are likely over the coming months," he said.

The Bank of England has forecast that the annual consumer price inflation rate is likely to fall below 1 percent later this year.

Lower prices seem to have encouraged more consumer spending. In fact, the British Retail Consortium reported that retail sales were up 1.4 percent in June on a comparable basis as warm early summer weather raised demand for summer clothes, outdoor goods and food.

June's increase, the third in six months, more than made up for the 0.8 percent fall recorded in May.

Freddie George, retail analyst at Seymour Pierce, said the June gain was less than robust, considering the weather was more favorable this year. "In addition several of the department stores started their summer sales early in June, and we believe there has been a higher level of discounting to stimulate sales," he comment.

The ONS said the retail price index -- which includes housing costs such as mortgage interest payments and council tax and is used in wage negotiations -- fell to minus 1.6 percent, the lowest since records began in 1948. Falling mortgage rates were a key factor in dragging the index into negative territory; the Bank of England's key lending rate is now 0.5 percent, compared to 5 percent a year ago.

"A sharp fall in furniture and household goods inflation suggests that the weakness of demand and activity could be starting to bear down on prices in some key high street sectors," Loynes added. "But that the bulk of the disinflationary effects of the deep recession in the economy have yet to be seen."

Most economic forecasters believe the British economy will continue to contract for some time and that unemployment, already above 2 million, could apporach 3 million by the end of the year.

In another report, the Royal Institution of Chartered Surveyors -- a professional body for housing experts who provide services such as valuing homes -- found that its members are becoming more optimistic.

The number of firms expecting a price rise was 6 percentage points higher in May than those who expected a fall. May's positive balance for expectations was the first since May 2007. In April, the pessimists were 11 points ahead.

Other recent house price surveys have produced mixed messages, some up, some down. Home builders are complaining that banks are holding back on the mortgage financing needed for the sector's recovery.

"Although rising buyer interest and a lack of sales instructions have led to a fall in the available stock of properties for sale, we are not convinced that it will put a lasting floor under house prices," said Seema Shah, property economist at Capital Economics.

More surveyors were reporting higher house prices in the three months ending in May but the majority -- 18 points more -- said prices were still falling. That compared to April when those reporting prices falls were 44 percent ahead of those reporting a rise.

AP Business Writer Pan Pylas in London contributed to this report

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