Surprise as inflation holds steady

Ivan Schwartz
July 19, 2018

United Kingdom headline inflation held steady for a second straight month and the core measure eased, complicating the picture for the Bank of England that is widely expected to hike interest rates in August.

Economists were expecting inflation to rise to 2.6 per cent.

However, although the price of gas and electricity increased, and petrol prices rose to their highest level since September 2014, the cost of clothing and computer games fell.

"Sterling could fall further today if the UK's retail sales data shows a decline in consumer spending", she said.

"Therefore, the pace of interest rates hikes is likely to remain very gradual". Economists had expected growth of 0.4%.

But in a note to clients, Capital Economics' senior United Kingdom economist Ruth Gregory said that while Wednesday's inflation numbers "perhaps reduce the chances of a rate hike in August. somewhat counter-intuitively, lower inflation might make it easier for the MPC to raise rates as it will relieve the pressure on consumers' incomes". The Bank said previously that if the economy continued to improve, it would raise rates. The latter, along with a smaller than expected rise in furniture & furnishing prices accounts for most of the downside surprise in today's numbers compared to the forecast.

Households were also squeezed by gas and electricity costs, which rose 2.5 per cent and 2.2 per cent respectively, month on month. There could, however, be rising inflation ahead as manufacturers raise their prices.

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But some relief emerged for consumers on the high street, where clothing discounts, most strongly felt in men's apparel, left more cash in shoppers' wallets.

"Transport [as a contributor to headline CPI] increased from 0.7 of a percentage point in May 2018 to 1.0 percentage points in June".

There was also a drop in the prices of games, toys and hobbies, particularly in the cost of computer games.

United Kingdom retail sales could increase by at least 0.4 per cent.

Meanwhile, monthly input price inflation eased notably to 0.2 percent from 3.3 percent in May.

The Bank has raised interest rates before in the past even when inflation has been below its two per cent target, in the expectation that inflationary pressures will build over the medium term.

The core rate of consumer price growth, which strips out volatile components of energy and food, was flat month-on-month in June, while growing by a worse-than-expected 0.9% on a year previous. Month-on-month, output prices gained 0.1 percent from May, when it rose by 0.5 percent.

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