United Kingdom: Inflation finally pulls back in June after surging since the start of the year
July 18, 2017
Consumer prices were flat in June compared to the prior month, down from May’s 0.3% rise. June’s reading was driven by lower prices for food and non-alcoholic beverages, alcoholic beverages and tobacco, recreation and culture and clothing and footwear, which offset higher prices for furniture, household equipment and maintenance and communication, amongst other sub-sectors.
Inflation dipped from a multi-year high of 2.9% in May to 2.6% in June, largely on the back of lower fuel prices. This surprised analysts, who had expected inflation to remain at 2.9%, and marked the first drop since last October. June’s figure has likely staved off an interest rate rise in the near term, following the most recent Bank of England monetary policy meeting which saw three committee members vote to tighten monetary policy in the face of rising inflationary pressures. Markets also took this view, with the pound losing value against the dollar immediately after the inflation announcement. The fall in inflation will be seen as a vindication for the stance of the Bank’s Governor Mark Carney, who in June declared that “now is not yet the time” to raise rates.
However, the United Kingdom is by no means necessarily over the inflation hump, with the effects of last year’s depreciation of sterling yet to fully feed through the system, as many firms take time to adjust their output prices in response to higher input costs. In addition, oil prices could well increase in the months ahead if the OPEC deal extension succeeds in limiting supply on world markets, which could lead to higher prices at the pumps. Inflation still remains significantly above the Bank’s 2.0% target, and is running ahead of nominal wage growth, with consumers being squeezed as a result.
Annual average inflation increased from 1.5% in May to 1.7% in June.
Author: Oliver Reynolds, Economist