U.K. inflation cooled more than economists forecast in July, giving the Bank of England room to keep its key interest rate at a record-low. The rate of price growth fell to 1.6 percent from 1.9 percent in June, the Office for National Statistics said today in London. Economists had forecast 1.8 percent, based on the median of 32 estimates in a Bloomberg survey. Separate data showed pipeline inflation pressure eased, with factory-gate prices posting the first annual decline in almost five years. The BOE kept its key rate at 0.5 percent this month and Governor Mark Carney said it’s not yet time to begin tightening policy. While Britain’s recovery is strengthening, supporting the case for withdrawing emergency stimulus, officials are trying to balance that against subdued earnings and inflation that’s below their 2 percent target. “With inflation under control for now, the BOE can keep any hikes gradual and allow the economy to keep growing strongly,� said Rob Wood, an economist at Berenberg Bank in London. “Weak wage growth means the BOE now believes that unemployment can fall further without pushing up inflation.� The pound extended its decline against the dollar after the data and was trading at $1.6637 as of 9:33 a.m. London time, down 0.5 percent on the day. Clothes Prices The biggest downward effect on the annual inflation rate last month came from clothes, due to an unwinding after an increase in prices in June, the ONS said. Consumer prices fell 0.3 percent in July from June, it said. Retail-price inflation, a measure used as a basis for the inflation-linked bond market and wage negotiations, slowed to 2.5 percent last month from 2.6 percent. That increase means regulated rail fares will increase by 3.5 percent on average next year under government rules that allow companies to lift ticket prices by 1 percentage point more than RPI. Chancellor of the Exchequer George Osborne, who faces an election in less than a year, changed the 2014 price increase to match RPI. While inflation is below the BOE’s target, it continues to outpace wage growth, squeezing consumers. Earnings fell an annual 0.2 percent in the second quarter compared with a year earlier, the first drop since 2009. The BOE cut its forecast for wage growth last week and Carney said the weakness is adding to uncertainty about the outlook for spare capacity and inflation. In a sign that upward pressure on inflation may remain under control, the ONS said input prices fell 1.6 percent in July from June and dropped 7.3 percent compared with a year earlier. That’s the biggest annual decrease since September 2009. The biggest driver of the decline was crude oil. Factory output prices fell 0.1 percent on the month and the year. The annual decline was the first since October 2009. In a separate report today, the statistics office said annual U.K. house-price growth slowed to 10.2 percent in June from 10.4 percent in May. Values increased 0.5 percent on the month. In London, annual price growth cooled to 19.3 percent from 20.1 percent. To contact the reporter on this story: Scott Hamilton in London at shamilton8@bloomberg.net To contact the editors responsible for this story: Craig Stirling at cstirling1@bloomberg.net; Fergal O’Brien at fobrien@bloomberg.net

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