Deflation threats are still surrounding the British economy since the start of the global downturn last year where the economic recession along with the slid in oil prices caused the general price level to decline noticeably, reaching levels below the target set by the Bank of England (BoE) to maintain price stability. In spite of the improvement witnessed in the previous period, more specifically, the second quarter of the current year, deflation remains the main risk that may derail recovery.

Activities slowed down the most in the first quarter this year as a result of the slump in consumer spending which in turn prompted firms to slash production and terminate jobs to deal with the economic downfall. The economy contracted the most since 1958 with 2.4% from January to March 31 due to the global slowdown which hit all sectors of the economy. Unemployment rate soared to 7.2% with 2.26 million looking for job vacancies, the highest level since November 1996.

Inflation rate has reached its lowest since the beginning of last year. However, CPI released in May showed improvement coming in at 0.6%, higher than both predicted and previous readings of 0.3% and 0.2% respectively. RPI for the same month also advanced to 0.6%, higher than both prior and estimated readings of 0.1% and 0.2% respectively.

In May, PPI input came in at 0.4%, lower than the revised prior of 1.7% from -1.0%, while PPI output non seasonally adjusted came lower than the revised of 0.7% from 0.6%.

Today, U.K. released its PPI input for June coming in at 1.5%, higher than the revised prior reading of 1.1% from 0.4% and better than the estimated 0.8%, on the year, the reading slipped to -11.5% from the revised reading of -8.6% from -9.4% which is higher than the expected -12.9%. The monthly reading inclined as a result of the surge in crude prices which jumped 14.3%, touching its highest this year above $73 a barrel.  

Moreover, PPI output came in at -0.2%, worse than both the predicted and preceding readings of 0.3% and 0.4% respectively, whereas the year reading recoiled to -1.2%, worse than the previous 0.4% and market expectations of -0.8%. Factory gate prices dropped unexpectedly dragging the monthly and yearly reading to the downside.

Also, PPI output core, which does not include food and energy prices, was released coming in at -0.8%, higher than both the expected and previous readings of 0.2%, while the year ending June came in at 0.1%, lower than the expected and previous readings of 1.1% and 1.2% respectively.  

Mervyn King and his economic team raised inflation estimates to be near 0.4% by the end of the current year before rising to 1.5% at the end of next year. The rate is expected to remain below the target in the medium and long term due to the slow recovery paces the economy is undertaking.

The financial sector is still suffering; Darling, the British finance minister, talked about putting stricter restrictions on the financial sector and allowing clients to be aware of what is happening with banks. Darling promised to have more competition in the financial system through allowing non-banking institutions to confer services to Britons.

Yesterday, policy makers at the Bank of England left their benchmark interest rate at its historical low of 0.5%. They also intend to end the plan of buying bonds worth 125 billion pound this month, and they will review what happened so far and their inflation estimates during their next meeting in August. A 112,055 billion pounds are spent till July 9. The bank will wait and see the market reaction to decide whether the economy is in a need of another stimulus or not.