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Inflation slips back to zero

Published 14/07/2015

The CPI rate of inflation has slipped back to zero
The CPI rate of inflation has slipped back to zero

Inflation slipped back to zero last month amid a round of womenswear summer sales and as a run of falling food prices reached its longest stretch for 15 years.

The Consumer Price Index (CPI) measure of inflation slipped back from 0.1% in May, in line with City expectations.

CPI has been hovering around zero since February, providing an extra boost to households as wage increases accelerate. Latest pay data tomorrow is expected to show a further improvement.

The Bank of England expects CPI - which fell below zero in April for the first time in more than 50 years - to turn higher later this year as the effect of falling oil and food prices fades.

It has been no higher than zero since February.

Philip Gooding, from the Office for National Statistics (ONS), said: "Inflation has continued its pattern of recent months, when prices have been very little changed on the previous year.

"The headline rate for June has dropped very slightly on May, back to zero, thanks to small downwards effects from movements in clothing and food prices and air fares."

The figures showed that clothing and footwear prices fell 0.4% between May and June this year.

This was a smaller reduction than usually seen at this time of the year when retailers mark down their summer ranges.

But it compares with a blip in 2014 when prices rose by 0.6% over the month as the timing of sales was pushed back. The main downward effect on inflation from clothes was led by womenswear, the ONS said.

Meanwhile the price of food and non-alcoholic beverages fell 2.2% year-on-year, the twelfth month in a row of declines. This was the longest stretch of falls since 2000.

Petrol prices rose 1.1p a litre between May and June, a bigger rise than in the same period last year, but the cost of petrol is still 13.6p a litre lower than a year ago.

Air fare rises were smaller than in 2014, particularly on European routes.

Core inflation - excluding the volatile effects of energy, food, alcohol and tobacco - slipped back to 0.8%. The figure is the lowest since March 2001.

The overall effect of food and fuel on the headline figure was to pull CPI down by 0.6%.

Retail Price Index inflation, a separate measure which includes housing costs, was unchanged at 1% in June.

Chris Williamson, chief economist at Markit, said the figures "raise questions over whether the underlying price pressures are really picking up to the extent that the Bank of England is anticipating".

He said tomorrow's pay data would help gauge whether a wage-price spiral was likely to develop and when the Bank is likely to pull the trigger on hiking interest rates.

That is because, despite inflation being well below its 2% target, policymakers must consider the path it is likely to take a couple of years down the track.

Rates have been held at 0.5% for more than six years and the Bank has previously appeared to endorse City expectations that they will not start to rise until the middle of 2016.

Samuel Tombs, of Capital Economics, said: "The continued weakness of inflation is boosting households' spending power without having any adverse knock-on effects on wages or spending."

He said that the UK looks set for another brief period of negative inflation partly because of a fall in oil prices over the last month feeding through to petrol pumps.

The strength of the pound, which means that imported goods are cheaper, would also weigh on CPI.

Ben Brettell, senior economist at Hargreaves Lansdown, said: "Inflation is back to square zero as the supermarket price war and summer clothes sales continue to weigh on prices.

"There is clear daylight between wage growth and inflation, putting more money in the pocket of consumers, who have faced tight household budgets since the financial crisis took hold.

"Continued low inflation probably means more pain for savers though, because the Bank of England is under no pressure to raise interest rates in the immediate future."

Martin Beck, senior economic adviser to the EY ITEM Club, said: "There is a good chance that we will see inflation turn negative again over the next couple of months.

"Inflation is likely to pick up from the latter part of this year, once the sizeable base effects caused by the collapse in oil prices begin to kick in.

"However, the absence of underlying inflationary pressures suggests that the headline rate will remain some way short of the 2% target in 2016.

"Consequently, we continue to expect the MPC (Monetary Policy Committee) to push back any decision to raise interest rates until well into next year."

David Kern, chief economist at the British Chambers of Commerce, said: "The pattern of CPI inflation over the past few months supports our assessment that inflation is likely to remain around 0% over the next few months.

"Our forecast is that inflation will edge up gradually from the end of this year, but will remain below 2% until well into 2016. Low inflation is a welcome boost for households and businesses and will help to support the economic recovery."

TUC general secretary Frances O'Grady said: "Inflation being so far below target shows that the strength and stability of the recovery can't be taken for granted.

"The Chancellor has to fix the fundamental problems with the economy, and most of all he must get productivity rising."

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