The UK’s inflation rate has fallen for the first time since October last year, defying expectations of no change in June, and slipping back from an uncomfortable four-year high of 2.9 per cent.
Headline inflation slipped back to 2.6 per cent in June, while core inflation also softened from 2.6 per cent to 2.4 per cent compared to the same month last year.
Calmer inflation should help ease the pain on workers who are facing their worst pay squeeze in three years, and alleviate pressure on the Bank of England’s policymakers to raise interest rates from record lows.
Here’s what UK economists are making of the numbers and their impact on monetary policy, the economy, and prospects for the pound.
Howard Archer at EY Item Club thinks it’s not quite time to open the champagne/English sparkling wine:
Consumers nor the Bank of England are likely to be celebrating too much just yet – consumers are still suffering from falling real earnings and the Bank of England has indicated in the past that it does not put too much attention on one month’s inflation data.
Still, he thinks the chances of inflation breaching 3 per cent have receded this year as oil prices have fallen and the pound has managed to find its feet in recent months.
But Samuel Tombs at Pantheon is less sanguine. He forecasts price growth will top 3 per cent in the coming months as sterling’s depreciation will continue to drive up import prices. He explains:
Food producer output prices rose 5.8% year-over-year in June, and supermarket prices usually lag only three months behind. In addition, sterling’s depreciation points on past form to core goods inflation picking up to about 2.8% in Q4, from 2.1% in June.
Meanwhile, EDF Energy’s price rise in late June will impact the CPI in July, and we expect British Gas to hike prices soon after its price freeze ends in August. As a result, we still expect CPI inflation to exceed 3% in Q4, just.
Mr Tombs thinks the Bank of England has all but “eliminated the chance of an interest rate rise at the August meeting”:
Indeed, the Committee likely will revise down its forecast for inflation next month, given the recent fall in oil prices and the deterioration in wage growth.
Hawks on the monetary policy committee have been emboldened by the spike in inflation this year, with three members voting for a rate hike in June.
But Suren Thiru, head of economics at the British Chamber of Commerce, is also urging the BoE to “hold its nerve” on a rate rise as the UK’s Brexit talks are well underway.
Raising rates too early could undermine consumer and business confidence, stifling UK growth further. More must also be done to ease the burden of high upfront business costs which continue to impede firm’s ability to invest, recruit and grow.
The BoE’s hawks will have lost some of their ammunition with this month’s figures, according to Chris Hare at HSBC:
Today’s inflation print offers the MPC extra breathing space, not least because CPI inflation has edged away from the 3 per cent mark, the point at which the Governor needs to write a letter to the Chancellor explain the ‘overshoot’ of the inflation target.
James Smith at ING notes June’s inflation decline was “broad based”, led by fuel price declines but also matched by a dip in clothing and the cost of recreational items such as games and today.
“This suggests that retailers are still having to offer heavy discounts in the face of lower consumer demand”, said Mr Smith.
Meanwhile, Sam Hill at RBC echoes Sam Tombs when he says:
It would be easy to over-interpret a 0.3ppt drop in CPI and miss versus consensus expectations of the same magnitude. However, it is the fifth time in nine months where the actual CPI inflation rate has deviated at least 0.2ppts away from the Bloomberg consensus forecast (in either direction). Furthermore, from the MPC’s perspective, this outturn is no different to what was expected at the time of the May Inflation Report – the surprise to them was that last month’s print was so strong.
Despite this month’s blip, inflation is heading towards 3% y/y and economic growth has slowed to below-trend quarterly rates, leaving the MPC with a difficult balancing act. Although recently the exchange rate has been relatively stable, the lags involved mean last year’s depreciation is still feeding through to higher imported inflation now and over the coming months.