- REUTERS / Amr Abdallah Dalsh
LONDON – Inflation remained unchanged in July, as the worst of Britain’s Brexit-driven price growth appears to be over.
The Office for National Statistics said in its latest release that the UK’s Consumer Prices Index (CPI) inflation rate – the key measure of inflation – was 2.6% in July, unchanged from June.
Inflation had been expected to climb a little from the 2.6% level seen in June, according to a poll of economists before the release.
CPI measures the weighted average of prices of a basket of goods and services, such as food, transportation, and medical care.
CPIH, a measure which includes costs associated with maintaining a home – and which the ONS cites as a more useful indicator of living costs than CPI – was also at 2.6%.
July’s inflation story was much the same as June’s with subdued fuel prices keeping prices relatively down, despite growing costs for food, clothes, and other household goods.
“The price of motor fuel continued to fall and provided the largest downward contribution to change in the rate between June 2017 and July 2017,” the ONS said in a release.
“This was offset by smaller upward contributions from a range of goods and services, including clothing, household goods, gas and electricity, and food and non-alcoholic beverages.”
“Falling fuel prices offset by the costs of food, clothing and household goods left the headline rate of inflation unchanged in July,” James Tucker, the ONS’ head of consumer price inflation said in a statement.
The chart below illustrates the sharp rise in inflation following last year’s Brexit vote. OOH represents owner occupiers’ housing costs, which measures the cost of owning, maintaining, and living in one’s own home:
The sharp fall in the value of the pound following the UK’s vote to leave the EU last year has raised the cost of imports and pushed up the rate of inflation. Inflation is expected to peak at more than 3% at some point in 2017, according to the latest Bank of England forecasts.
Tuesday’s data suggests that the recent prognosis Ben Broadbent, the Bank of England’s deputy governor for monetary policy, that the very worst of the post-Brexit vote squeeze on British household finances is coming to an end, may be correct.
Speaking in an interview broadcast by BBC Radio Five Live’s Wake Up To Money earlier in August, Broadbent said that while Brits are feeling the pinch, they should not expect it to last much longer as inflation will reach its post-referendum peak in the second half of the year, while wage growth will also begin to accelerate.
“I recognise that this is painful for people, but it’s about the maximum rate of pain we’re getting to right now,” he said.
That’s a view backed up by Ben Brettell, a senior economist with FTSE 100 investment firm Hargreaves Lansdown.
It now looks quite possible inflation has peaked, and will fall back further incoming months,” he wrote in an email.
“All this is good news for the consumer, as it helps alleviate the continuing squeeze on household finances, though pay is still shrinking in real terms for now.”
The ONS’ latest wage growth numbers will be released on Wednesday, giving a better indication of whether Broadbent and Bretell are right. It is expected to show wage growth remained at 1.8% for the three months to July.
As inflation rose earlier in the year, expectations grew that the Bank of England would hike interest rates to combat the spiralling cost of living, but with inflation moderating from its 2.9% peak, that hike is now some way in the distance. That was made evident by the 6-2 vote by the bank’s MPC to leave rates unchanged at its August meeting.
In normal circumstances, inflation of 2.6% would likely push the bank to increase rates, but it must also balance the fact that the wider British economy is set to slow sharply as 2017 progresses, driven by Brexit-related uncertainty, and that the sharp growth in inflation seen in the UK right now is likely to be temporary.