The City was surprised by the fall in the annual inflation rate to 1.6%. It shouldn't have been since the explanation was simple: the summer sales came late this year.
Clothing and footwear retailers cut their prices by 5.7% in July, a heftier discount than the 3.2% in
As a result, inflation was a bit higher than might have been expected in June but a bit lower in July. The annual increase in the cost of living as measured by the Consumer Prices Index (CPI) has settled in a narrow range just below the government's 2% target; in the past seven months it has never been higher than 1.9% and never lower than 1.6%.
Even with July's drop in inflation, prices are still rising faster than earnings, which are going up at an annual rate of 0.6%. At the start of the year there was a lot of talk about how 2014 was going to be the year of the pay rise. That now looks unlikely. Living standards will carry on falling deep into the autumn even if wages do start to pick up.
Some City analysts think 2014 will also be the year of the interest rate rise. That, too, is starting to look questionable given not just the weakness of CPI inflation but also the lack of any real price pressure in the pipeline. The producer prices index, a guide to the costs paid by manufacturers and the price of goods leaving factory gates, shows that the drop in fuel and raw material costs together with tight control of pay is allowing firms to cut tariff prices.
An interest rate rate rise by the end of the year – November being the likeliest date – should not be ruled out, but it will be on the basis of what the Bank of
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