Inflation dips but UK trade deficit widens

A second back-to-back interest rate rise looked less likely yesterday after figures showed inflation dipped unexpectedly last month as a result of cheaper furniture.

Inflation fell to 1.4 per cent in July, its lowest level since April, thanks to discounts by furniture retailers during the summer sales and lower telephone tariffs. Although inflation remains below the Bank of England's target of 2.0 per cent, policymakers are concerned that inflationary pressures are building and will push up the consumer price index in the months ahead.

The attention of UK markets will focus on the Bank's Inflation Report today for further clues to the next rates move. "More important for monetary policy strategy is the medium-term outlook for inflation," said Philip Shaw, chief economist at Investec.

"We expect this to present a similar outlook to that expressed last time around: that unless interest rates continue to rise from their current level, inflation is set to rise above the 2.0 per cent target over the next two years."

Economists said fervent price discounting by furniture retailers could signal that the UK's housing boom was finally slowing. James Carrick, an economist at ABN Amro, said: "The slowdown in furniture came a lot sooner than we expected. This might indicate that demand for houses from buy-to-let investors is slowing."

Prices of furniture and furnishings fell 4 per cent on the month, the biggest July fall since records began, the Office for National Statistics (ONS) said. The British Retail Consortium said yesterday that despite heavy discounts furniture retailers "struggled" last month.

Elsewhere, goods prices were also "pegged back by food" the ONS said, with prices dropping in July compared with a year ago. The impact of these falls was partly offset by a rise in the cost of cable television subscriptions, the price of package holidays in Europe and a sudden 22.5 per cent month-on-month jump in the cost of airfares.

"The inflation data will certainly reduce the pressure on the Bank of England to raise interest rates again [in September]," Mr Carrick said.

Separate figures showed Britain's goods trade gap with the rest of the world widened unexpectedly in June to a fresh record of £5bn, from £4.8bn in May. Analysts had predicted a gap of £4.5bn.

That widening brought the quarterly goods and services gap to a record £10.8bn from £9.2bn in the previous quarter. The ONS said the widening was driven by a fall in the oil surplus. At £22m, the oil surplus was the smallest since August 1991, when there was a deficit of £20m.

Vince Cable, the Liberal Democrat Treasury spokesman, said: "These record figures reflect the deep imbalances in an economy fuelled by consumer debt and the house price boom."

But David Page, at Investec Securities, said: "With continued hopes for gradual recovery in the eurozone and signs of ongoing improvement for the UK manufacturing sector, we maintain some optimism that the trade deficit should start to narrow over the course of the second half of this year."