The Consumer Prices Index measure of inflation dipped back to 1.6 per cent in the year to July, falling from 1.9 per cent in June.
FTAdviser sister publication FastFT revealed he pound slid 0.5 per cent immediately after the data were released to the weakest level versus the US dollar since early April, marking the biggest fall of any major currency in the world today.
This is the seventh month in a row that the measure has been below the Bank of England’s central target of 2 per cent.
Alasdair Cavalla, economist at the Centre for Economics and Business Research, warned that “a long-stretch of below-target inflation increases the likelihood that the Bank of England will raise interest rates in early 2015 rather than this year”.
He said: “Spare capacity, which is the Bank’s stated guiding factor in its decision, is remaining higher for longer than expected.
“This was demonstrated by the second quarter’s lacklustre wage growth, and underlined last week by the Bank’s estimate of spare capacity in the economy of around 1 per cent, only marginally down from May’s estimate of between 1 per cent and 1.5 per cent.”
Mr Cavalla added that “recent signals suggest the Bank seems likely to wait until next year before raising the base rate”.
Last week, the Bank of England revealed that ‘normal’ interest rates are unlikely to be higher than those of “yesteryear” and will only hit 2.25 per cent by the first quarter of 2017.
Other market commentators warned that pensioners are still a vulnerable group.
Alan Higham, director of retirement for Fidelity Worldwide Investment, said: “People entering into retirement should not underestimate how much inflation is likely to impact their purchasing power.
“Those reaching state pension age before 6 April 2016 should particularly consider using their private pension to defer state pension to increase their guaranteed inflation linked income.”
Vanessa Owen, LV’s head of annuities and equity release, said that the fall in inflation is particularly important for retirees as this segment of society spends a considerably higher proportion of their disposable income on bills and less on luxury items.
“Whilst there are retirement solutions available that provide an element of inflation-proofing, the majority of annuities are purchased on a level basis. However following the pension reforms we expect this to change as increasing numbers of retirees look to alternatives such as fixed term and investment linked annuities.”
Aston Goodey, sales and marketing director at MGM Advantage, said: “Older generations are living longer and face the challenge of ensuring their savings last the distance while trying to maintain a standard of living.
“The corrosive effects of inflation could halve incomes over a 25-year retirement. This is why it is important you think about your income options to try and maintain your standard of living.”
