The UK’s inflation rate dipped back to 1.6 per cent in July, markedly below economists’ expectations and easing pressure on the Bank of England to raise rates this year.
Inflation had unexpectedly jumped to 1.9 per cent in June, spurring bets that the Bank of England would be forced to hike interest rates as early as this year. Last month’s decline will embolden the central bank’s dovish members to resist premature increases.
Economists had expected the rate to fall, but only to 1.8 per cent. Last month’s inflation rate is near the five-year low of 1.5 per cent touched in May. In the month, prices fell 0.3 per cent, also more than economists polled by Bloomberg expected.
The widely followed retail price index – an anachronism but a popular one among many households that feel it better reflects their experiences – fell to 2.5 per cent – also somewhat below forecasts.
Slowing inflation has given the Bank scope to keep interest rates on hold at a record low, even as the property market has boomed, unemployment declined sharply and the economic recovery continued to gain pace.
The Bank of England’s policymakers are now increasingly focusing on wage growth as a factor when discussing when to lift rates, as it could be a leading indicator for an upswing in inflation.
Subdued inflation has been partly caused by sterling’s rise to a six-year high against the dollar earlier this year, which cut the cost of imports. Since the peak of $1.7165 in early July, the pound has declined 2.8 per cent versus the dollar, but it remains a dampening force on consumer prices.
