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UK Inflation Fails to Rise as Expected

UK inflation has undershot expectations, sticking at 2.6% instead of the 3% predicted by some economists - but the rate is still above the Bank's target of 2%

Emma Wall 15 August, 2017 | 10:24AM

Commuters at Waterloo Station

Inflation has stuck at 2.6% for the month of July. The latest Consumer Price Index data undershot expectations – with many economists predicting a rise in inflation rates ahead of this morning’s announcement.

There was good news for motorists as the price of fuel continued to fall, acting as the largest downward contribution to July’s data. Fuel prices fell by 1.3% between June and July 2017, the fifth successive month of price decreases. However, on an annual basis fuel prices rose.

There was upward pressure from clothing, household goods, gas and electricity and food and non-alcoholic beverages. On an annual basis electricity and gas rose 4.7%, while the cost of household goods rose 4.1%. Transport services rose 5.1% and the cost of motor insurance jumped 12.4%. Alcoholic beverages and tobacco rose 5.1%.

Alex Marsh of Close Brothers Retail Finance said the inflation rate may not have risen to 3% but it was still a concern for consumers: “Inflation remained above the target rate at 2.6% in July with a knock-on effect on consumer spending, which stifled disposable income and forced Brits to tighten their belts.

“Coupled with the fall in real wages, July saw consumer confidence at rock bottom and left retailers in a vulnerable position as consumers were priced out of purchasing many of their desired products.”

Ben Brettell, Senior Economist, Hargreaves Lansdown suggests that inflation may have peaked and will fall back in the coming months.

“The year-on-year increase in producers’ raw material costs fell to 6.5% in July – undershooting forecasts for a 7% rise. This was down from 10% in June, the biggest month-to-month slowdown in almost five years. Input prices are a leading indicator for consumer price inflation as higher input prices are often ultimately passed on to the consumer, and therefore a lower number here could bode well for softer consumer prices down the line,” he explained.

“All this is good news for the consumer, as it helps alleviate the continuing squeeze on household finances, though pay is still shrinking in real terms for now. Tomorrow’s labour market update is expected to show wage growth remained at 1.8% for the three months to July.”

Some Good News for Savers

While the Bank of England base rate remains at the stubbornly record low level of 0.25%, account providers are bucking the trend, raising rates for savers. Data from Moneyfacts.co.uk reveals that the savings market has now seven consecutive months of more rising rates than cuts. Banks and building societies raised rates on 151 accounts last month, versus 45 cuts.

Sixty percent of the rises are for fixed-rate cash bonds, with the average two-year fixed rate account offering 1.04% at the beginning of the year, rising to 1.32% at the start of August.

Moneyfacts’ Rachel Springall says that despite these rises, Government initiatives such as Funding for Lending and its successor Term Funding Scheme will keep rates lower for longer.

"Savers are likely to have a few more years of low interest rates ahead of them. Combined with inflation eroding their hard-earned cash, it wouldn’t be too surprising to find this is deterring people from putting money aside,” she said.

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About Author Emma Wall

Emma Wall  is Senior Editor for Morningstar.co.uk