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The Bank of England is seen against a blue sky in the City of London October 6, 2011. (SUZANNE PLUNKETT/REUTERS)
The Bank of England is seen against a blue sky in the City of London October 6, 2011. (SUZANNE PLUNKETT/REUTERS)

U.K. inflation hits lowest in more than two years Add to ...

U.K. inflation fell to its lowest in more than two years in April, raising the prospect that the Bank of England will be able to inject more stimulus later this year to support the economy.

The Office for National Statistics said consumer price inflation eased to 3.0 per cent in April from 3.5 per cent in March, freeing BoE Governor Mervyn King from the obligation to write an explanatory letter to finance minister George Osborne.

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Separately, the ONS said Britain’s public sector posted a record surplus in April, due to one-off factors, while government borrowing in the 2011/12 fiscal year was revised down to £124.399-billion ($196-billion U.S.), equivalent to 8.2 per cent of GDP.

Economists had been expecting a sizeable fall in inflation due to a spike in some prices in April last year not being repeated this year.

The ONS said the fall in annual inflation was driven by lower inflation for air and sea transport, clothing and alcohol.

Core CPI, which excludes food and fuel costs, and has been a particular source of concern to some BoE policymakers, fell to 2.1 per cent, its lowest since November 2009.

The BoE targets a 2-per-cent rate for headline CPI. If inflation is more than 1 percentage point above this, Mr. King has to explain why this is every three months.

Inflation has now been above the BoE’s 2-per-cent target for almost 2-1/2 years and Tuesday’s data come a week after the central bank predicted it would say there for at least another r year before falling to 1.6 per cent by mid-2014.

Until April, British inflation had fallen more slowly than the BoE expected this year - a factor which many economists said lay behind its decision not to expand its £325-billion quantitative easing program this month, despite the economy having fallen back into recession.

Separate figures on Tuesday showed Britain’s public finances posted a record surplus in April, a firm start to the 2012/13 financial year.

The ONS said the measure of public sector net borrowing excluding financial sector interventions - the government’s preferred metric - showed a surplus of £16.520-billion last month compared with a deficit of £9.063-billion in April 2011.

The figures were flattered by the transfer of £28-billion of pension fund assets from the Royal Mail, which were transferred to the government as it prepares to sell off part of the state-owned postal services. Profits from the BoE’s Special Liquidity Scheme for banks added £2.3-billion to the surplus.

But April’s one-off gain from the Royal Mail assets will be more than offset by liabilities of £38-billion which will gradually show up in the public finances in years to come.

Excluding the Royal Mail assets, PSNB-ex came in at £13.8-billion.

The Office for Budget Responsibility forecasts government borrowing will fall to £120-billion in the 2012/13 financial year.

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