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Higher fuel prices and dearer used cars drive inflation to 0.6% in July

Published 16/08/2016

The Consumer Price Index rose to a higher-than-expected 0.5% in June after holding at 0.3% in April and May
The Consumer Price Index rose to a higher-than-expected 0.5% in June after holding at 0.3% in April and May

Inflation rose to a higher-than-expected 0.6% last month as the increasing cost of motor fuels and second-hand cars drove up transport prices.

Consumer Price Index (CPI) inflation in July was up from 0.5% in June, the Office for National Statistics (ONS) said.

E conomists were expecting the figure to be unchanged.

But while there was no sign of the plunge in the value of the pound having an impact on CPI, the ONS said the Producer Prices Index (PPI) showed the slump in sterling following the Brexit vote had pushed up the cost of imports for British manufacturers.

Input prices rose 4.3% in the year to July, compared with a drop of 0.5% in the year to June, as it was partly impacted by the fall in the value of the pound, which drove up the cost of imported metals and chemicals.

Mike Prestwood, head of prices at ONS, said: "The Consumer Prices Index has continued in July its recent slow upward trend since late 2015, with transport costs the biggest single factor this month.

"There is no obvious impact on today's consumer prices figures following the EU referendum result, though the Producer Prices Index (PPI) suggests the fall in the exchange rate is beginning to push up import price faced by manufacturers.

"These are the first sets of consumer and producer prices data collected since the referendum polling day."

The ONS said CPI was impacted by transport costs rising by 1.6% between June and July this year, compared with a 1.2% increase over the same period a year ago, while the prices of second-hand cars fell less than they did a year ago.

It added that alcoholic drinks also stepped up 0.5% month on month in July, compared with a fall a year ago, as wine prices dropped by less than they did in 2015.

Meanwhile, food and non-alcoholic drinks fell 0.2% between June and July, which is lower than a 0.7% drop over the period last year.

However, downward pressure on CPI came from the price of housing, water, electricity, gas and other fuels, which was unchanged over the period after rising by 0.3% last year, while recreation and culture costs slipped 0.1% this year compared with a 0.2% increase a year ago.

The price of petrol rose from 111p in June to 111.8p a litre in July, while the cost of diesel, climbed from 112.1p to 113p a litre over the period.

The ONS said the Retail Prices Index (RPI) - a separate measure of inflation, which includes housing costs - rose to 1.9% in July, up from 1.6% in June.

The CPI update comes amid a bleak outlook for the UK economy, with many experts slashing their growth forecasts after a string of dire reports.

The Bank of England cut interest rates for the first time since 2009 at the beginning of the month and delivered an emergency package of measures worth up to £170 billion to ward off recession following the Brexit vote.

Policymakers on the Monetary Policy Committee (MPC) voted unanimously to cut rates to a historic low of 0.25% from 0.5% - the first cut since March 2009 when the Bank reduced rates at the height of the financial crisis.

Official figures show the UK economy had picked up pace in the run-up to Britain's vote to leave the European Union, with gross domestic product (GDP) growing 0.6% in the second quarter, up from 0.4% in the first quarter.

However, influential think-tank the National Institute of Economic and Social Research (NIESR) estimates that gross domestic product (GDP) fell by 0.2% month on month in July.

For the three months to July, NIESR said the economy eked out growth of 0.3% in a "marked economic slowdown" on the second quarter, when GDP increased by 0.6%.

Samuel Tombs, chief UK economist at Pantheon Macroeconomics, said the fall in sterling was "entirely responsible" for the rise in CPI inflation.

"Sterling's depreciation ensured that pump prices rose by 0.7% month-to-month even though dollar oil prices declined.

"The rise in food price inflation to minus 2.6%, from minus 2.9% in June, and leap in alcoholic drinks inflation to minus 2.4%, from minus 5.3%, is a further sign that the pound's collapse-which began in November-is pushing up inflation."

He added: "Labour market weakness might constrain wage growth soon, but with productivity also likely to fall sharply as the economy slows, firms' cost pressures will remain intense.

"As a result, we continue to think that CPI inflation will hit 3% in the second half of 2017. Given the extent to which inflation likely will overshoot the 2% target, we think the MPC will hold back from additional Government bond purchases next year once the current £60 billion tranche has been completed."

Scott Corfe, director of the Centre for Economics and Business Research (CEBR), said consumers should brace themselves for a rise in the cost of living in the months ahead.

"The sharp decline in the value of sterling since the Brexit referendum will translate into higher prices for imported goods over the coming months, pushing inflation to above 2.5% in the first half of 2017.

"Combined with stagnant pay growth, we expect real (inflation-adjusted) employee earnings to decline by 0.1% in 2017, after rising by 2.4% in 2015 and 1.5% this year. The UK's strongly consumer-driven economic recovery is about to grind to a halt."

The pound was up 0.7% against the dollar at 1.2977 US dollars following the inflation announcement, while sterling was flat against the euro at 1.1513 euros.

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