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Economy: Bigger than expected fall in July CPI inflation

10:01 19 August 2014

CPI inflation eased back to 1.6% last month, from 1.9% in June, official figures revealed today.

CPI inflation eased back to 1.6% last month, from 1.9% in June, official figures revealed today.

Inflation fell more sharply than expected last month as a late start for clothing sales spilled over into July.

The Consumer Price Index (CPI) measure of inflation fell from 1.9% in June to 1.6%, meaning that inflation has been below the Bank of England’s 2% target for seven months in a row.

It is the longest run of below-target figures since the era of low inflation which began in 1997 and ended in 2005.

The steep fall is likely to ease any pressure on the Bank of England to raise interest rates amid speculation about the timing of the first increase since they were slashed to 0.5% five years ago.

The largest downward contribution to inflation came from clothing and footwear, which fell 5.7% between June and July. Prices of these products usually fall at this time of year but the drop was larger in 2014 as retailers had held off on discounts in June amid robust demand.

Food and non-alcoholic beverages fell by 0.4% year on year after no change in June and a 0.6% drop in May. The May figure was the first decline since March 2006 and the three consecutive month of flat or negative inflation is the longest period in nearly a decade.

The last longest run of flat or falling food prices was at the end of 2004, when they fell on an annual basis for five months in a row.

CPI was also eased in July by falling prices for spirits and wine, while bank overdraft charges and fees for bankers’ drafts put downward pressure on inflation too.

However, increases in used car prices and sea fares made an upward contribution.

Samuel Tombs, senior UK economist at Capital Economics, said the data was “considerably weaker” than anticipated by the Bank of England’s rate-setting monetary policy committee (MPC) in its latest Inflation Report last week.

“July’s fall in UK CPI inflation puts it back on a downward trend which we still think could see it ease to as low as 1% by the end of the year,” he said.

“The decline in CPI inflation from 1.9% in June to 1.6% was in line with our below-consensus forecast. The drop partly reflected a fall back in inflation in the clothing and household goods sectors which had been boosted in June by the slightly later start to the summer sales this year.

“Food price inflation also eased from 0% to -0.4% in July, reflecting a combination of falling commodity prices and intense competition.”

He added: “July’s outturn is considerably weaker than the 1.9% figure anticipated by the MPC in last week’s Inflation Report. And we continue to expect the 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.

“So, while low inflation may not be sufficient to prevent the MPC from moving to ‘normalise’ interest rates soon, we believe that a general environment of benign inflationary pressure will give the committee scope to raise them at an even more gradual pace than currently anticipated by the markets.”

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