Inflation in 'surprise' fall as oil price drops

Inflation in 'surprise' fall as oil price drops

The CPI measure of inflation has fallen for the first time this year, with the figure dipping by 0.3 percentage points to 2.6 per cent in June.

CPI inflation - which was at 0.5 per cent in June 2016 - has generally strengthened over 2017, but saw its momentum weaken in the latest reading as the oil price fell and food inflation failed to materialise.

In May CPI rose 0.2 percentage points from 2.7 per cent in April.

The Office for National Statistics (ONS) highlighted that while transport costs were still inflationary, their impact on the overall headline inflation rate had weakened in recent months. This was the "primary" reason for the fall last month, a period where the price of oil fell 6 per cent.

Compared with May, transport inflation was down. Meanwhile food inflation was lower than expected, given underlying commodity market movements.

The decline could reduce internal pressures at the Bank of England's Monetary Policy Committee (MPC). The last meeting in June showed the committee was split on whether to increase base rates, with the next meeting due on August 3.

Aberdeen Asset Management chief economist Lucy O'Carroll described the numbers as a "real surprise" and suggested  it would "kill" any chances of a rate rise next month.

"We can expect the calls for a rate rise to reduce to a whimper," she said.

"The sharp fall in CPI inflation in June brings it back in line with the MPC’s May Inflation Report forecast and almost certainly eliminates the chance of an interest rate rise at the August meeting," said Samuel Tombs, chief UK economist at Pantheon Macroeconomics.

The decline was also due to a 0.2 percentage point fall in core inflation, to 2.4 per cent. The ONS said it expected sterling weakness to have increased prices further, but Mr Tombs warned against assuming the impact of sterling weakness had diminished.

"We had expected the impact of [oil price falls] to be offset by a large rise in food inflation, but it only edged up to 2.3 per cent in June from 2.1 per cent in May.

"Both food and core goods inflation still have further to climb in response to sterling’s depreciation," he added.