United Kingdom: Inflation remains unchanged in July, still substantially above Central Bank's target
August 15, 2017
Consumer prices dipped 0.1% in July compared to the prior month’s flat reading. July’s reading, the lowest in six months, was largely driven by lower prices for clothing and footwear, furniture, household equipment and maintenance and communication, while transport was the only sub-sector to record a significant price uptick.
Inflation in July was stable at June’s 2.6%, largely on the back of lower motor fuel prices, undershooting analysts’ expectations for the second consecutive month and remaining below May’s multi-year high of 2.9%. This has likely kicked the possibility of an interest rate rise firmly into touch for the time being, especially as preliminary GDP figures for Q2 confirm that the economy has slowed markedly from last year. Markets also took this view, with the pound losing value against the euro immediately after the inflation announcement.
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 have increased slightly over the last month and could well rise further in the months ahead, leading to higher prices at the pumps, while the recent weakness of the pound against the euro will make imports more expensive.
Annual average inflation increased from 1.7% in June to 1.9% in July.
Author: Oliver Reynolds, Economist