UK Producer Prices Fell in May

THE TAKEAWAY: UK producer prices fell in May -> Companies pressured to cut costs as consumer confidence drops -> BoE yesterday held stimulus unchanged -> Pound remains weak against safe currencies

The producer price index for output in the UK fell 0.2% in May as companies cut costs in an environment of weak consumer confidence. The fall in prices was greater than expected. Prices in May 2012 were 2.8% higher than one year ago, which was a smaller increase than the expected 3.2%. The fall in prices was also attributed to plummeting energy costs.

The Bank England yesterday decided to keep its monetary policy unchanged, keeping interest rates at 0.50% and the quantitative easing target at 325 billion pounds. Even so, further easing in the months to come cannot be ruled out as Europe’s debt crisis escalates.

The Bank of England’s most recent monthly inflation report said “the possibility that the substantial challenges within the Euro area will lead to significant economic and financial disruption continues to pose the greatest threat to the UK recovery.”

The UK Pound remained weak against the US Dollar and Japanese Yen following today’s release, which was seen as a further indicator of economic contraction.