Dip in inflation eases rate fears

THE prospect of another rise in interests receded, at least for the time being, yesterday after a sharp drop in inflation took pundits by surprise.The Consumer Prices Index (CPI) fell back below the Bank of England's 2% target for the first time in more than a year, dropping half a percentage point from 2.

THE prospect of another rise in interests receded, at least for the time being, yesterday after a sharp drop in inflation took pundits by surprise.

The Consumer Prices Index (CPI) fell back below the Bank of England's 2% target for the first time in more than a year, dropping half a percentage point from 2.4% in June to 1.9% in July, the Office for National Statistics said.

The decline, the biggest monthly fall for more than five years, surprised the City which had forecast a drop of only 0.1% to 2.3%.

The news should see the bank's Monetary Policy Committee hold off from raising rates at its next meeting in September, with some analysts predicting it may now sit tight until November as it monitors the full effects of the five rate rises since August last year.


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The Retail Prices Index (RPI), which is often seen as a more representative measure of inflation as it includes mortgage interest payments also fell last month, from 4.4% in June to 3.8%.

Falling food prices led the reduction in inflation after supermarkets implemented a raft of price cuts at the end of June, slashing the cost of meat, vegetables and bread.

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However, those reduced prices may only offer a temporary respite with food price inflation expected to pick up over the coming months after the severe flooding in July impacted crops in the UK and as the global wheat crisis continues to put pressure on animal feeds and cereal prices.

In addition, average petrol prices dipped by 0.3p a litre during July - against a 2p per litre increase at the same time last year - but again steep rises in cost of oil at the end of the month could see this effect reversed.

Summer sales led to a record monthly fall in furniture prices as retailers offered heavy discounts to entice shoppers into stores during the wet weather. However, prices here are also set to recover in August following the end of the July sales period.

The Bank of England indicated in its most recent inflation report that it expects to have to raise rates by a further quarter point to 6% this year if it is to keep inflation under control.

However, Narinder Gill, senior economist at the British Chambers of Commerce, said yesterday: “This drop in inflation should make it even more unlikely that the MPC will be in a rush to raise interest rates to 6% any time soon.

“With the effect of the recent rate rises appearing to have the impact they were meant to and the increasing instability in the financial markets, it would be folly for the MPC to raise rates next month.”

CBI's director-general, Richard Lambert, said: “This unexpectedly big dip to just below the bank's target rate is good news and means that, especially with the current uncertainty in financial markets, the MPC should sit tight on interest rates for the time being.”

Peter Patterson, senior economist at the Institute of Directors (IoD) added: “Some reduction in inflation was always expected because of this year's cuts in domestic energy prices, but core inflation - excluding food and energy - has also dropped sharply after several months of remorseless increases.

“Following the market volatility over the past week, the Monetary Policy Committee will wish to hesitate before raising interest rates again, to see whether this month's figures are an aberration or the start of a more favourable trend in underlying inflationary pressures.”

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