Surprise dip in inflation stays Bank’s hand on rates

Economists believe MPC officials will reconsider vote to increase interest rates next month

INTEREST rates could stay at record lows as a result of the surprise dip in inflation last month, which is expected to push policymakers at the Bank of England to reconsider voting for a rate rise.

Three of the eight members of the Monetary Policy Committee voted to raise rates last month, fearing rising inflation.

However, price rises fell back to 2.6pc in June, down from 2.9pc in the 12 months to May in a surprise break from the steep upward trend in prices.

Economists believe that could encourage the MPC to keep rates at 0.25pc – the emergency level that was introduced last summer after the Brexit vote.

James Smith, economist at ING, said: “The Bank of England has taken a noticeably hawkish line recently, but today’s data casts doubt over a rate hike later this year. Even if inflation does recover, the decision to hike rates still hinges on the growth outlook.

“Governor Mark Carney recently suggested that the Bank needs to see stronger investment and a recovery in wage growth before tightening policy. But political uncertainty, the deteriorating outlook for consumer spending and rising cost bases from higher import prices mean that both look unlikely to materialise.”

The fall in the pound has pushed up the cost of imported goods in recent months, forcing shop prices higher and putting household budgets under pressure. Average weekly pay increased by 1.8pc in the 12 months to May, which meant that it failed to keep up with living costs. The slowdown in June’s infla- tion was caused in part by a slump in oil prices, which was passed on at the petrol pump, according to the Office for National Statistics (ONS), which publishes the figures.

“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,” said Jonathan Athow, deputy national statistician at the ONS.

“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.”

Food inflation accelerated again in June, with prices up 2.3pc on the year as the cost of breads and cereals, dairy products and fish all climbed. Furniture and household equipment also added to the pace of inflation, as did communications goods.

Clothing and shoes saw a small fall in inflation, however, with price growth slowing from 3.1pc to 2.7pc.

The break in the surge in prices may only represent a brief reprieve, however. Economists believe inflation could rise to above 3pc in the coming months before starting to fall again in 2018.

“While we still think that CPI inflation will reach a peak of about 3pc towards the end of 2017, it seems likely to drop back pretty quickly in 2018,” said Ruth Gregory at Capital Economics, noting that companies are reporting a slowdown in their input costs. “CPI inflation should now not be too far away from its peak. Indeed, the effects of sterling’s slide already appear to be fading at the start of the production line.”

At the same time, the ONS said house prices continued to stall, rising by just 0.5pc in May. The annual rate of growth in May was 4.7pc, down from 5.3pc in the year to April, bringing the average UK house price to £221,000.