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Back to zero inflation: falling food and clothing prices drag rate back to 0.0% Back to zero inflation: falling food and clothing prices drag rate back to 0.0%
(about 2 hours later)
Summer clothing discounts pulled UK inflation back down to zero last month, bringing more relief to households and taking pressure off the Bank of England to raise interest rates any time soon.Summer clothing discounts pulled UK inflation back down to zero last month, bringing more relief to households and taking pressure off the Bank of England to raise interest rates any time soon.
Official figures showed inflation on the consumer price index (CPI) measure dipped back to zero in June, from 0.1% in May. That was in line with the consensus forecast in a poll of economists by Reuters, although some had predicted prices could be down on a year earlier and mark a return to the negative inflation recorded in April. Official figures showed inflation on the consumer price index (CPI) measure dipped to zero in June, from 0.1% in May. That was in line with the consensus forecast in a poll of economists by Reuters, although some had predicted prices could be down on a year earlier and mark a return to the negative inflation recorded in April.
Back to zeroBack to zero
Some economists predict inflation could still turn negative again over coming months given a recent dip in oil prices and the strength of the pound, which makes UK imports cheaper. Some economists predict inflation could still turn negative in the coming months given a recent dip in oil prices and the strength of the pound, which makes UK imports cheaper.
“June’s UK consumer prices figures show that the continued weakness of inflation is boosting households’ spending power without having any adverse knock-on effects on wages or spending,” said Samuel Tombs, senior UK economist at the consultancy Capital Economics. “June’s UK consumer prices figures show that the continued weakness of inflation is boosting households’ spending power without having any adverse knock-on effects on wages or spending,” said Samuel Tombs, a senior UK economist at the Capital Economics consultancy.
“Looking ahead, the UK looks set for another brief period of deflation ... And while inflation should rebound towards the end of the year when the anniversary of the plunge in oil prices is reached, we think it will take a long time for CPI inflation to return to its target.” “Looking ahead, the UK looks set for another brief period of deflation … And while inflation should rebound towards the end of the year when the anniversary of the plunge in oil prices is reached, we think it will take a long time for CPI inflation to return to its target.”
The Office for National Statistics said falls in clothing and food prices were the main downward pressures on inflation last month. There was also a downward pull thanks to smaller rises in air fares between May and June than a year ago, offsetting a pick up in petrol prices last month. There were no large upward effects. The Office for National Statistics said falls in the prices of clothing and food were the main downward pressures on inflation last month. There was also a downward pull thanks to smaller rises in air fares between May and June than a year ago, offsetting a rise in petrol prices last month. There were no large upward effects.
Downward dragDownward drag
The core rate of inflation, which excludes volatile items such as energy and food, also eased last month to a 0.8% rate from 0.9% in May. The core rate of inflation, which excludes volatile items, such as energy and food, eased last month to 0.8% from 0.9% in May.
Bank policymakers have appeared relaxed about inflation being well below their 2% target. The dip earlier this year into negative inflation had been widely predicted, including by the Bank’s governor, Mark Carney, after a sharp drop in oil prices since last summer. He recently told Britons to enjoy the period of low prices while it lasts. Bank of England policymakers have appeared relaxed about inflation being well below their 2% target. The dip earlier this year into negative inflation had been widely predicted, including by the Bank’s governor, Mark Carney, after a sharp drop in oil prices since last summer. He recently told Britons to enjoy the period of low prices while it lasted.
Economists agree that inflation is likely to rebound but say in the meantime the Bank’s monetary policy committee (MPC) can afford to take its time deciding when to start raising borrowing costs from 0.5%, where they have been for more than six years. Markets are not pricing in a rise until well into 2016. Economists agree inflation is likely to rebound but say that in the meantime the Bank’s monetary policy committee (MPC) can afford to take its time deciding when to start raising borrowing costs from 0.5%, where they have been for more than six years. Markets are not pricing in a rise until well into 2016.
While inflation is well off the government-set target and has been characterised by some government critics as a sign of economic fragility, for households it means they are better off in real terms. While such low inflation has been characterised by some government critics as a sign of economic fragility, for households it means they are better off in real terms. Official figures on Wednesday are expected to show wages rising 3.3% during the three months to May after growth of 2.7% in the three months to April. That would be the fastest pace for five years and bring relief after years of average pay falling in real terms because it lagged inflation.
Official figures on Wednesday are expected to show wages rising 3.3% during the three months to May after growth of 2.7% in the three months to April. That would be the fastest pace for five years and bring relief after years of average pay falling in real terms because it lagged inflation. Some Bank policymakers have expressed concern about wage growth picking up and, in time, raising inflation in the wider economy.
Some Bank policymakers have expressed concern about wage growth picking up and in time raising inflation in the wider economy. Chris Williamson, chief economist at Markit, saying attention would then focus on Wednesday’s wage data. Chris Williamson, chief economist at Markit, said: “The Bank of England needs to determine whether pay growth will continue to accelerate as firms compete for staff, or whether low inflation will keep the overall rate of increase below levels that would normally worry the monetary policy committee into hiking interest rates.”
“The Bank of England needs to determine whether pay growth will continue to accelerate as firms compete for staff, or whether low inflation will keep the overall rate of increase below levels that would normally worry the monetary policy committee into hiking interest rates,” said Williamson. A continued rise in wages could prompt the two MPC members concerned about inflationary pressures – Martin Weale and Ian McCafferty – to vote for a hike as soon as next month, economists have said. Both policymakers voted to lift rates last year.
A continued pick-up in wages could prompt the two MPC members concerned about inflationary pressures, – Martin Weale and Ian McCafferty – to vote for a hike as soon as next month, say economists. Both policymakers voted to rate rises last year. “We expect the two hawks on the Bank of England’s monetary policy committee ... to vote in favour of an immediate rate hike at the August meeting given the uncertainty on Greece has diminished following [Monday’s] agreement,” said James Knightley, an economist at ING Financial Markets.
“We expect the two hawks on the Bank of England’s monetary policy committee ... to vote in favour of an immediate rate hike at the August meeting given the uncertainty on Greece has diminished following [Monday’s] agreement,” said James Knightley, economist at ING Financial Markets.
“However, the rest of the MPC are far more cautious and will want to be confident that inflation is indeed heading back towards target before opting for a rate hike. We continue to see the first move in Bank rate coming in February next year.”“However, the rest of the MPC are far more cautious and will want to be confident that inflation is indeed heading back towards target before opting for a rate hike. We continue to see the first move in Bank rate coming in February next year.”