Inflation falls to 2.6%, which could 'kill off' talk of interest rate rises

18 July 2017
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Inflation has unexpectedly fallen to 2.6% in the year to June – down from 2.9% in May, according to the Office for National Statistics (ONS) latest Consumer Prices Index (CPI) figures.

Falling prices for motor fuels and certain recreational and cultural goods and services were the main contributors to the fall in inflation.

However, these downward contributions were partially offset by rising prices for furniture and furnishings.

The fall in inflation may come as a surprise given some experts had predicted it to peak above 3% this summer before settling down to around 2% – the government’s official inflation target – in 2018.

Ben Brettell, senior economist at investment platform Hargreaves Lansdown comments: “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.”

Adrian Lowcock, investment director at Architas, adds: “The main drivers of inflation over the last year have been due to one off events largely outside of the control of the Bank of England. The underlying trend continues to be one of weak inflation as there is little wage growth in the UK. The drop in inflation will be good news for households who have been bearing the brunt of rising prices but without a commensurate increase in their income. The drop in inflation is also likely to kill off talk of the Bank of England raising interest rates any time soon.

“This would be welcome news to home owners, as mortgage rates are likely to stay low for longer, and should help support the UK economy as it gives households more certainty. But once again savers are the ones to suffer and will have to wait much longer to see a decent return on their deposits.”

The ONS’s preferred measure of inflation – the Consumer Prices Index including owner occupiers’ housing costs (CPIH) – also fell to 2.6% in June compared with 2.7% in May. The CPIH is not a recognised National Statistic.

The Retail Prices Index (RPI), which is no longer used by the ONS but which is still used to calculate telecoms price rises and index-linked gilts (government loans), fell to 3.5% in June from 3.7% in May.  

Comments

In reply to by anonymous_stub (not verified)

Nice to see the BoE decision, not to raise rates last autumn, has not created too much of an inflationary effect due to lack of support for sterling. Inflation should now unwind further through the year.

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