Inflation suffers a surprise fall in June, dropping from its highest level since the Brexit vote

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Reuters/Clodagh Kilcoyne

LONDON – Inflation suffered a surprise fall in June, pulling back from its post-Brexit high, according to the latest data released on Tuesday.

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 June, down from 2.9% in May.

Inflation had been expected to remain unchanged at the 2.9% level seen in May, 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%, although it fell from just 2.7% in the previous month.

“Falling prices for motor fuels and certain recreational and cultural goods and services were the main contributors to the fall in the rate,” the ONS said.

“These downward contributions were partially offset by rising prices for furniture and furnishings.”

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.

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ONS

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, but the lower cost of fuel, triggered by a broader fall in global oil prices, helped subdue the number in June.

“Today’s fall in inflation is mainly due to drops in petrol and diesel prices. However, the rate remains higher than in the recent past,” ONS Deputy National Statistician Jonathan Athow said in a statement.

“Petroleum products were mainly behind the drop in the annual growth rate of factory gate prices. Likewise, crude oil was mainly responsible for the recent slowing of input price inflation, with both its dollar price down and some recovery in sterling.”

Tuesday’s data suggests that some of the post-Brexit squeeze on UK household finances may have been lessened in June, but worries still remain for the UK’s consumers.

“Falling inflation alleviates the squeeze on household finances – though pay is still shrinking in real terms for now. Last week’s labour market update from the ONS showed wages growing by less than inflation for a third consecutive month,” Ben Brettell, a senior economist at investment firm Hargreaves Lansdown writes in an emailed statement.

“Pay (including bonuses) grew by 1.8%, meaning that after inflation, average earnings in the three-month period fell by 0.7% compared with a year earlier.”

“If inflation continues to moderate, this could bode well for economic growth – the UK economy is heavily reliant on the consumer, and economists had expected falling real incomes to eventually translate into lower retail sales. If this fails to materialise the economy could see a stronger second half to the year.”

The pound fell sharply on news of the miss, dropping as expectations that the Bank of England are now less likely to hike interest rates in the near future as a result of the lower than forecast number. Here is the chart a few minutes after the release:

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Investing.com