News Column

Fall in inflation puts brakes on rate rise: July's figure of 1.6% lower than analysts predicted Household budgets under pressure as wages stay flat

August 20, 2014

Angela Monaghan



Prospects of an interest rate rise this year dimmed yesterday after the annual rate of inflation fell more sharply than expected in July.

The consumer prices index fell to 1.6% from 1.9% in June, the seventh month in a row that annual inflation has registered below the Bank of England's 2% target, according to data from the Office for National Statistics. Economists had expected a slight dip to 1.8%.

The drop in price rises was driven mainly by the later timing of summer discounting among clothes retailers this year compared with 2013. Clothing and footwear prices fell by 5.7% between June and July, compared with a smaller fall of 3.2% during the same period last year.

Alcohol prices, the cost of some financial services including bank overdraft charges, and food prices also contributed to the fall.

Samuel Tombs, senior UK economist at Capital Economics, said inflation could fall as low as 1% by the end of the year, partly because a stronger pound in recent months has made the cost of imports into the UK cheaper.

He said: "We continue to expect the [Bank's monetary policy] committee to be surprised by inflation's weakness over the coming months. The disinflationary effects of sterling's appreciation have not fed through fully to the shops yet. Sharp falls in wholesale energy prices mean that utility bills should hold broadly steady this winter. And the recent weakness of wages growth should keep a lid on price rises in the consumer services sector."

A Treasury spokesman gave credit for the fall in inflation to the government. "The long-term economic plan is working, with today marking the seventh consecutive month that inflation has been below the Bank of England's 2% target.

"But the effects of the great recession are still being felt and so we have taken continued action to help with the cost of living, including cutting income tax, freezing fuel duty and reducing the costs of childcare."

The news was not all good for consumers, who face average rail fare rises of 3.5% in 2015. The July inflation rate on the retail prices index (RPI) measure is used to calculate rail fare rises, and dropped to 2.5% last month from 2.6% in June. Increases are traditionally capped at RPI+1%, although train operators may raise fares on some routes by an extra 2%. That means some rail fares could increase by up to 5.5%.

Mark Carney, the Bank of England's governor, has given mixed messages in recent weeks on the likely timing of a first increase in interest rates. Economists said a lack of inflationary pressure in the UK, coupled with weak wage growth, made a rate hike in 2014 less likely.

James Knightley, economist at ING, said: "On the face of it this supports an on-hold stance from the Bank of England. The combination of sterling strength (making imported goods cheaper), along with weak wage growth and lower energy prices, which are limiting business cost growth, means inflation looks set to remain contained for now.

"This further eases the pressure on the Bank of England to consider near-term interest rate rises and pushes the balance more in favour of a delay to rate hikes versus our current November official view for the first policy tightening move."

Household budgets remain under pressure as wage growth has lagged behind the inflation rate for the vast majority of people over the past six years.

Pay growth including bonuses fell by 0.2% between April and June compared with a year earlier. Stripping out bonuses, pay was up by only 0.6% in a year - less than a third of June's 1.9% inflation rate.

Shadow Treasury minister Cathy Jamieson said: "While this fall in the rate of inflation is welcome, the squeeze on working people continues."

The pound fell to an eight-month low against the dollar of $1.6634 after the July data was published as investors interpreted it as a sign rates would stay on hold into 2015. The euro rose 0.4% to 80.25p.

Captions:

Hunting for a bargain at the Harrods summer sale. The fall in inflation was driven by the later timing of summer discounting this year Photograph: John Phillips/Getty



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Source: Guardian (UK)


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