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Lower inflation than expected could signal freeze on interest rates

  • 15/08/2017
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The UK Consumer Prices Index (CPI) rate of inflation has confounded market expectations of a chunky rise, remaining at 2.6% in July.

Economists were expecting CPI inflation to be higher, but declining motor fuel prices helped offset rising clothes, utilities, and food prices.

This will provide some respite for consumers in the face of continued weakness in wages, however a survey from the Chartered Institute of Personnel and Development (CIPD) today predicted that pay rises would be just 1% over the next year.

It said in spite of falling unemployment, wage growth was weak because the supply of labour had also gone up.


Mortgage market concerns

The mortgage industry has raised concerns that the rising inflation rate is one of the key reasons behind a stalling market and fears that affordability is worsening.

However, Investec Wealth and Investment bond strategist Shilen Shah said the weaker than expected CPI figure could be good for mortgage interest rates.

“CPI has probably not hit its peak, however a weak domestic backdrop suggests it will drop back soon after, with core service CPI supporting this thesis,” he said.

“From a monetary policy perspective, Sterling’s fall post the release of the data is another indicator that the Bank of England is likely to sit on its hands over the next few months, with Brexit related uncertainty also starting to limit economic activity and underlying inflationary pressures.”


Commuter anger

However, this will not help beleaguered rail commuters who will see their rail fares rise by the Retail Prices Index (RPI) level of inflation, which hit 3.6%.

The gap has fuelled commuter anger, with passengers questioning why the government is persisting in using the higher and statistically poor RPI figure instead of the more widely used CPI figure.

David Sidebottom, director of Transport Focus, the independent transport user watchdog, said: “Yet again, passengers, now majority funders of the railway, face fare rises next January.

“Commuters do not give value for money on their railways a high satisfaction score – just one third according to our latest survey. So while performance remains patchy and with pay and wages not keeping pace with inflation, they will feel rightly aggrieved if they are paying much higher rises next January.

“Why is the government not using its preferred measure of inflation: the one that is used to determine wages and pension increases, and one which is often lower than RPI? Passengers deserve a fairer deal.”

The key difference between RPI over CPI is that it includes the costs of housing (mortgage interest costs and council tax for example) while CPI does not.


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