UK inflation edges closer to 2% target

UK inflation edges closer to 2% target

The rate of UK inflation rose slightly in July but it is still likely to fall below the Bank of England’s 2 per cent target next year, according to Samuel Tombs, chief economist at Pantheon Macroeconomics.

Data from the Office for National Statistics (ONS) showed the cost of the average basket of goods and services rose to 2.5 per cent in July, up from the 2.4 per cent it stood at in the previous three months, driven largely by food and energy prices.

But Mr Tombs noted inflation in the services sector of the economy was "very weak" and consistent with the notion overall inflation would fall below 2 per cent next year.

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The rate of core inflation, which strips out the items that have the most consistent volatility of price movements, was 1.9 per cent, which is already below the Bank of England’s target.

Investors may also note that the rate of core inflation was unchanged month on month, indicating little upward pressure on inflation.

Because fuel and food are economic necessities, core inflation is a better measure of the level of discretionary spending, that is, spending on items over which a consumer has a choice to buy or not.

Core inflation remaining static indicates little demand in the economy for such discretionary items, but also no decline in demand, and so should mean economic growth is neither dramatically slowing, nor dramatically declining right now.

The most recent UK GDP figure, covering the second three month period of the year, showed economic expansion of 0.4 per cent, double the 0.2 per cent recorded in the first quarter.

The Bank of England lifted interest rates to 0.75 per cent in August, the highest level since the financial crisis. 

Job Curtis, who runs the £1.6bn City of London investment trust, recently told FTAdviserhe feared higher inflation could force the central bank to put interest rates up further.

A rise in inflation could be caused by a further sharp fall in sterling or a continued decline in the number of EU migrants coming to the UK to work, he said.

Graham Spooner, investment research analyst at The Share Centre, said: "The Bank of England had predicted the rise in inflation in July, and economists are generally of the view that that inflation will ease in the latter part of the year."

But he added: "Lurking on the immediate horizon are the various trade tiffs between the US and China, Turkey and Europe which hold the potential to further impact and push prices up in the future which in turn might give the Brit on the street plenty to think about on return from their summer holidays.

"For personal investors, the reality of poor real wage growth continues to make finding disposable income to save and invest challenging, which in turn will be another negative for some famous names on the high street, many of whom will be desperate for us to spend in the all-important November / December period."