UK 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 per cent from 1.9 per cent in June, the Office for National Statistics said today in London. Economists had forecast 1.8 per cent, 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 per cent 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 per cent 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 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 per cent in July from June, it said.

Retail prices

Today's report also showed that annual retail-price inflation, a measure used as a basis for the inflation-linked bond market and wage negotiations, slowed to 2.5 per cent last month from 2.6 per cent. That increase means regulated rail fares will increase by 3.5 per cent 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 0.2 per cent in the second quarter compared with a year earlier, the first annual decline 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 the economy. In a sign that upward pressure on inflation may remain under control, the ONS said input prices fell 1.6 per cent in July from June and dropped 7.3 per cent 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 UK house-price growth slowed to 10.2 per cent in June from 10.4 per cent in May. Values increased 0.5 per cent on the month. In London, annual price growth cooled to 19.3 per cent from 20.1 per cent.

Bloomberg