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UK inflation slips back to zero BoE rate hike months away

BOE The future of cash - Quarterly Bulletin 

British inflation fell back to zero in August after oil prices dropped at the fastest rate since the start of the year, keeping annual price growth far below the Bank of England's target and an interest rate rise off the table for now.

Headline consumer price inflation (CPI) dipped into negative territory for the first time in more than 50 years in April, and has been 0.1 percent or lower over the past six months, despite solid economic growth and rising wages.

What the BoE first expected to be a short-lived phenomenon is now proving somewhat more persistent, though surveys still show neither the British public nor analysts expect the economy to slip into a deflationary spiral of falling prices.

The Office for National Statistics said the fall in annual CPI to zero in August from 0.1 percent in July was due to lower fuel costs and a smaller rise in clothes prices than a year ago.

Clothing was also responsible for core inflation -- which the BoE now looks at more closely as it strips out volatile energy prices -- falling to 1.0 percent from 1.2 percent.

Price pressures look set to stay low, too. The cost of goods leaving factories fell by an annual 1.8 percent in August -- matching January's record decline -- while manufacturers' crude oil costs are down by almost half compared with a year earlier.

"Against this backdrop, hawkish comments by (BoE policymakers) Kristin Forbes or Martin Weale over the weekend sound hollow," economists at Barclays wrote to clients.

"To remain on track for a rate hike in Q1 2016, domestic data, including inflation, will now need to consistently surprise on the upside."

While a rate rise by the U.S. Federal Reserve could come as soon as Thursday, BoE Governor Mark Carney has said similar action by the BoE will not come into sharper focus until the turn of the year.

Most economists polled by Reuters last week forecast the BoE would start to raise rates early next year, but financial markets think it will be rather later in 2016. The British central bank has had to postpone planned tightening in past years.

BoE forecasts last month pointed to inflation returning to and then exceeding its 2 percent target in a couple of years.

Some policymakers think this rebound could be sharper, and one, Ian McCafferty, voted for a rate rise last week.

Forbes said on Friday that rates would need to rise "sooner rather than later" and Weale said on Sunday that a move should come "relatively soon".

But most MPC members think wage pressures are too weak for prices to rise rapidly, especially as economic productivity is finally starting to rise, taking the edge off the inflation impact. Data on Wednesday is forecast to show a 2.5 percent annual increase in wages in the three months to July. ECONGB (Reuters London)

(Editing by Catherine Evans)

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