The UK Producer Price Index is set to shrink -0.1% in January to bring the annual pace of wholesale inflation to 3.4%, the lowest since September 2007. Price growth topped out with commodities prices in July last year, peaking at 10%. The decline in PPI signals the likelihood of further slowdown in consumer prices, the headline inflation gauge, as firms pass on lower manufacturing costs via lower prices for finished products. Easing price pressure allowed the Bank of England to cut interest rates to 1%, the lowest ever, as policymakers scramble to put a floor under tumbling economic growth. However, BOE Governor Mervyn King suggested that further reductions are not to be expected even as inflation undershoots the bank’s inflation target of 2%, noting the economy will get a “significant” boost as past measures are digested. Beyond benchmark interest rates, King had mentioned in a recent speech that “marked” contraction in the first half of 2009 may prompt a move to quantitative easing in the near term, including measures where the central bank would buy corporate bonds and commercial paper to boost access to lending.
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