Belfast Telegraph

Slower inflation cools interest rate hike speculation

Inflation unexpectedly slowed last month, knocking back the chances of an interest rate hike and easing the pressure on household finances.

The Office for National Statistics (ONS) said the Consumer Price Index (CPI) measure of inflation fell to 2.6% in June, down from a near four-year high of 2.9% in May.

While the drop was below economists' expectations of 2.9%, CPI remained above the Bank of England's target of 2%.

The fall in the cost of living was largely driven by a slide in fuel and computer game prices, while some upward pressure came from the cost of food, which recorded smaller falls for June compared to the same month a year ago.

Sterling took a tumble following the announcement, as lower inflation means the Bank is less likely to raise interest rates from record lows of 0.25%.

The UK currency, which had touched 1.31 US dollars earlier in the day, slipped back to 1.30 US dollars and fell by 0.5% against the euro to 1.13 euro.

The Brexit-hit pound has caused inflation to march higher up until this point , tightening the squeeze on consumers who are also grappling with sluggish wage growth.

Total pay in real terms sank by 0.7% in the three months to May in contrast to last year, and fell by 0.5% excluding bonuses for the period, according to ONS figures published last week.

Andrew Sentance, senior economic adviser to PwC, said the UK will still see higher inflation this year despite last month's fall.

He said: "It is still likely that inflation will reach 3% or a little higher in the second half of the year.

"Consumers felt some respite from the inflation squeeze last month, but price rises are still likely to run ahead of wage increases for the rest of this year - continuing the current consumer squeeze and holding back economic growth."

The main downward pressure on the cost of living came from fuel, which saw the fourth consecutive month of falling prices, dropping 1.1% between May and June.

Petrol prices rolled back by 1.1p over the period to 115.3p per litre, while diesel also declined by 1.4p to 117.3p.

Recreational and cultural goods, which includes computer games, also drove overall prices lower, dropping by 0.1% on the month following a rise of 0.6% last year.

Upward pressure on everyday prices came from food, which saw costs ease back by a smaller 0.3% in June compared with a 0.4% fall for the same month in 2016.

Ben Brettell, senior economist at Hargreaves Lansdown, said inflation could boost the UK economy if the pullback continues.

He said: "If inflation continues to moderate, this could bode well for economic growth - the UK economy is heavily reliant on the consumer, and economists had expected falling real incomes to eventually translate into lower retail sales.

"If this fails to materialise, the economy could see a stronger second half to the year."

Bank governor Mark Carney said at the end of June that "some removal of monetary stimulus is likely to become necessary", but would depend on whether an increase in business spending could counter the slowdown in consumer spending.

Concerns over rising inflation caused t hree out of the eight Monetary Policy Committee (MPC) members - Ian McCafferty, Kristin Forbes and Michael Saunders - to unexpectedly back a move to increase rates to 0.5% during the last vote.

The Bank expects inflation to peak at 3% by the autumn of this year.

The Consumer Price Index including owner occupiers' housing costs (CPIH) fell to 2.6% in June, down from 2.7% in May.

CPIH is the ONS's preferred measure of inflation, which includes costs associated with living in, maintaining and owning a home.

The Retail Price Index (RPI), a separate measure of inflation which includes council tax and mortgage interest payments, reached 3.5% last month, down from 3.7% in May.

Speaking at the unveiling of the new £10 in Winchester, the governor of the Bank of England, Mark Carney, said: "The big picture remains the same, which is that what is pushing inflation up is the fall in the currency which happened around the time of the referendum.

"That's the market's judgment of what the future, medium term consequences for real incomes for the United Kingdom, from the referendum, not the longer term consequences, that's what is pushing inflation up and inflation will be above target for a period of time, and today's figures are consistent with that."

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