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Shoppers enjoy falling food prices as inflation stays low

Published 18/08/2015

Inflation is expected to have remained at zero last month
Inflation is expected to have remained at zero last month

Shoppers are enjoying their longest run of falling food prices on record according to official figures that showed overall inflation remaining near historic lows at 0.1%.

The Consumer Price Index (CPI) measure of inflation was slightly higher than expected in July, edging up from zero in June due to the weaker impact of summer clothing sales compared to last year.

But CPI was held back by the ongoing supermarket price war, with a 2.7% year-on-year fall in the price of food and non-alcoholic beverages.

It was the 13th month in a row of decreases, the longest such stretch in data going back to 1989.

The figures from the Office for National Statistics (ONS) also gave some cheer for rail passengers with Retail Prices Index (RPI) index inflation - a separate measure that includes housing costs - remaining at 1%.

July's RPI is used to set annual regulated fare rises and is the lowest RPI figure for this month since 2009.

Richard Campbell, ONS head of CPI, said: "This is the sixth month running that headline inflation has been at or very close to zero.

"While households will have seen individual prices rise and fall, the overall shopping basket bought by the country remains little changed in price compared with a year ago.

"The latest slight increase is mainly due to clothing, with smaller price reductions in this year's summer sales compared with a year ago.

"Food and motor fuel prices continued to fall and have helped stop a larger rise in the rate of inflation."

Lord O'Neill, Commercial Secretary to the Treasury, said: "Today's inflation figure shows the benefit of an economic plan that is working, with a strong combination of low prices and rising pay packets.

"This is great news for working people and family budgets, but the job is not done and we will continue to remain vigilant to all risks, particularly when the global economic situation is so uncertain."

The rise in the headline CPI rate comes as a slight surprise as it was widely expected to remain at zero.

But the Bank of England thinks the plunge in oil prices will continue to press down on inflation until the middle of next year.

Ultra-low inflation has held back the Bank from voting for any rise in interest rates, which have remained at 0.5% since 2009.

However, Kristin Forbes, a member of the Bank's Monetary Policy Committee (MPC), warned this week that waiting too long before hiking rates could risk undermining the recovery - comparing the prospect to a sunbather being burned by staying out too long.

The slight uptick in inflation for July is the result of seasonal month-on-month falls in clothing and footwear prices in July this year being smaller than larger than usual reductions in 2014.

Those reductions had in turn followed sharper than usual increases between May and June 2014.

Average petrol prices between June and July this year rose by 0.1p and diesel fell by 2.5p, compared with a bigger rise for petrol last year and a flat month for diesel.

In the latest figures, the combined effect of food and fuel prices left the overall rate of CPI 0.7% lower than it would otherwise have been.

These factors have been holding inflation down amid a plunge in the world oil price and a supermarket price war as major grocers vie to fend off the threat of discounters Aldi and Lidl.

Core inflation in July, stripping out volatile energy, food and tobacco prices, rose to 1.2% - its highest rate since February.

Samuel Tombs, senior UK economist at Capital Economics, said: "The small rise in UK CPI inflation from 0% to 0.1% in July merely reflects a slight shift in the timing of summer discounting of clothing and so has little bearing on the timing of the first interest rate rise.

"Looking ahead, the scale of the recent fall back in oil prices suggests that CPI inflation is still likely to turn negative again over the next few months.

"And while inflation should pick up at the very start of 2016 as the anniversary of the previous plunge in oil prices is reached, it still looks likely to remain well below the MPC's 2% target next year.

"The inflation outlook is still too weak for the MPC to justify raising interest rates this year - lift-off can be postponed until Q2 2016."

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