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Surprise inflation drop eases pressure to raise base rate

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  • 18/07/2017
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The UK’s annual inflation rate fell back unexpectedly in June after hitting a four-year high in May.

The Office for National Statistics (ONS) data showed said that inflation in June rose 2.6% over the previous year, down from 2.9% in May. The fall was driven by the lower cost of petrol, after a significant fall in the oil price from mid-May to mid-June. The costs of recreational services – such as package holidays – also fell.

Falling inflationary pressures should help households struggling with lower wages. Wage growth has continued to stagnate in spite of rising employment. ONS data earlier this month showed inflation-adjusted weekly pay (including bonuses) fell by 0.7% year-on-year in the three months to May.

ONS data also showed that house price and rent rises remained steady to the end of May – although London is seeing prices flatten or even fall.

Adrian Lowcock, investment director at Architas, said: “The drop in inflation is likely to kill off talk of the Bank of England raising interest rates any time soon.

“This would be welcome news to homeowners, as mortgage rates are likely to stay low for longer, and should help support the UK economy as it gives households more certainty. But once again savers are the ones to suffer and will have to wait much longer to see a decent return on their deposits.”

 

Savers squeezed

With inflation pressures falling there is less pressure on the Bank of England to raise interest rates. Sterling responded negatively, falling against the US dollar and the Euro.

Maike Currie, investment director for personal investing at Fidelity International, added: “This will be cold comfort for Britain’s cash strapped consumers – inflation is still well above the Bank of England’s 2% target rate and outpacing our earnings. Last week’s wage growth figures show regular pay growing at just 2% for the three months to May, confirming that our pay packets aren’t keeping up with rising prices despite the UK’s unemployment rate reaching its lowest level since 1975.

“This is tightening the squeeze on UK households, which is bad news for an economy that relies on confident consumers spending on goods and services. Retail sales figures out on Thursday will provide a telling health check on just how spending is fairing.”

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