The U.K. National Statistics Office announced the CPI index today which gave a reading of 4.2 percent on a year on year basis, despite expectations for it to remain unchanged from May at 4.5 percent.
The unexpected fall in inflation gives an indication that the British economy slowed for the first time in three months due to a decrease in consumer spending, which in turn resulted in a fall in costs of recreational goods (TVs, DVDs, toys,etc).
The Bank of England target inflation rate is two percent, which BoE Governor Mervyn King reiterated on Monday that inflation should slow towards this target rate within the next two years.
A series of weak domestic economic data recently gave enough evidence to the bank that the British economy is still sluggish, and consequently held interest rates unchanged at record low of 0.5 percent.
“This ongoing bout of pretty weak data did take some pressure off the Bank of England to tighten policy,” Philip Rush, an economist at Nomura Holdings Inc. in London, said before the report was released. “But even with growth being very weak, the slack in the economy is still being used up and that inflationary pressure will build further down the line.”
Following release of the CPI data, Sterling plummeted by 73 pips against the Dollar within a minute, with GBPUSD touching as low as 1.5779 from 1.5852. EURGBP pared earlier losses to rise to 0.8805 within 5 minutes from 0.8763 pre-news.