Bank rate hike odds recede as inflation remains unmoved
UK inflation surprisingly held steady in July, reducing some of the pressure on the Bank of England for a rate hike but keeping up the squeeze on household budgets.
The UK consumer prices index rose 2.6% for a second month in July, the Office for National Statistics revealed on Tuesday, when it had been expected to rise to 2.7%.
Food, drink and clothing prices drove inflation with a small pick-up on the month, this was offset by a big downward contribution from lower fuel prices at the pumps, which sent CPI down 0.1% month-on-month, when it had been forecast to remain flat.
Core CPI, which excludes more volatile prices like fuel and food, also remained at 2.4% when it had been forecast to rise to 2.5%. CPIH, the ONS new preferred measure as it takes account of including owner occupiers’ housing costs, also remained at 2.6% when a rise to 2.7% had been anticipated.
However the retail price index increased 3.6%, up from the 3.5% rate seen in June.
BANK OF ENGLAND FOCUS ON CPI
But the unmoved CPI was the second consecutive reading to fall short of the market's forecasts, though it was in line with the BoE's Monetary Policy Committee, which calculated inflation is likely to spike up to a peak of around 3% in October.
Effects from the pound's post-Brexit collapse on input producer prices "are unwinding", the ONS said, leading to a sharp moderation in the growth rate of producer prices, to 6.5% in July from 10.0% in June, the biggest fall since 2012.
The market reaction's was to push the pound lower to its lowest level in a month just above 1.29.
The BoE has "a little more wiggle room" now, said analyst David Cheetham at XTB. "Today’s number marks the second successive lower than expected reading for this widely viewed measure of inflation and the strong rise seen since the start of the year appears to have been halted.
"Even though the reading is significantly above the 2% target for the BoE the fact that it is below forecast will be pleasing to Governor [Mark] Carney and the other members of the MPC and will allow the rate-setting committee a little more leeway when it comes to policy decisions going forward."
CONSUMERS UNDER PRESSURE
While a steadying of inflation in July "further dents prospects of a rate rise", said Chris Williamson at IHS Markit, it "does little to allay worries about the current squeeze on household budgets and the potential impact on the economy".
Risks remain skewed towards inflation rising in coming months, he said, while further data from ONS this week is likely to show wage growth has remained below 2%, which he said highlights how earnings continue to be squeezed.
And although official data showed producer input prices inflation cooling from 10.0% to 6.5%, IHS's more recent gauge of commodity prices has been rising again in recent weeks.
“Higher costs are translating into higher selling prices. PMI data showed average prices charged for goods and services rose at an increased rate again in July, contrasting with slower rates of increase seen in prior months, as inflationary pressures in supply chains intensified again. With higher energy prices also hitting households in coming months, it’s clear that there are a number of factors that could send inflation higher."
Paul Hollingsworth at Capital Economics said agreed that CPI is still likely to inch up a bit further before the year is out.
"We still think that inflation will climb to about 3% by around October, as the effects of sterling’s slide continue to be feed through. However, that should be inflation’s peak."
Hollingsworth pointed to the ONS producer prices figures showing that the rise in firms’ cost pressures has continued to ease and that output price inflation ticked down from 3.3% to 3.2%. "Admittedly, it will take some time for easing cost pressures for firms to be reflected in shop price inflation. And tomorrow’s labour market figures are likely to show that inflation is still outpacing wage growth."