Falling petrol prices keep inflation steady

Steady CPI of 2.6pc leads to fall in sterling as traders digest prospect of Bank of England delaying action

Falling petrol prices are keeping a lid on inflation, which economists believe means the Bank of England is less likely to put up interest rates. Consumer prices rose by 2.6 per cent in the 12 months to July, the same rate as in June, as declining petrol prices offset rising food and clothing costs.

FALLING petrol prices are keeping a lid on inflation, and economists believe that means Mark Carney at the Bank of England is less likely to put up interest rates.

Consumer prices rose by 2.6pc in the 12 months to July, the Office for National Statistics (ONS) said, the same rate as in June, because falling petrol prices offset rising food and clothing costs to keep inflation steady.

That is still above the Bank of England’s 2pc target, but is unlikely to be high enough to scare the Monetary Policy Committee into raising rates.

Analysts had predicted inflation would rise to a level a little above 3pc by the end of this year. But prices have not spiralled as quickly as feared, so economists are trimming back their forecasts. ING expects inflation will peak at 2.9pc in the final quarter of 2017, down from 3pc in its July forecast.

“Although we expect CPI inflation to rise a bit further over the months ahead, the end of inflation’s ascent now looks in sight,” said Victoria Clarke, an economist at Investec.

The average economist expects inflation will hit 3pc in the last three months of 2017 but go no further, with price pressures building more slowly and dropping more quickly from that peak, reducing pressure on the Bank.

“Inflation in July remaining below May’s peak level facilitates the Bank of England holding off from raising interest rates any time soon,” said Howard Archer, chief economic adviser to the EY Item Club.

“We believe it is highly unlikely that the Bank will raise interest rates in 2017, with growth likely to remain lacklustre over the second half and with inflation looking close to peaking and likely to fall back appreciably in 2018. We certainly would not be surprised if interest rates remained at 0.25pc going into 2019.”

Sterling fell sharply against the euro as traders digested the likelihood of lower-for-longer interest rates. The pound slid to €1.097, a drop of 0.33pc.

Prices are still rising faster than wages, however, so there remains a squeeze on living standards despite the lower-than-expected inflation. Food price inflation accelerated, rising from 2.3pc in June to 2.6pc in July, while the prices of clothes and shoes also rose more quickly, up from 2.7pc to 3.2pc.

Transport price inflation slowed the most, down from 1.5pc in the 12 months to June to 0.8pc in July. That is largely due to the average litre of petrol costing 114p in July – up from 112p in July 2016, but down from a recent peak of 120p in March.

However, the retail prices index edged up to 3.6pc in July. This is an old index which does not accurately reflect the cost of living – but it is important because regulated rail fare increases for 2018 are capped at July’s RPI figure.

As a result commuters and other rail users can expect a consumer price inflation-busting increase in the cost of their tickets next year.

“A hike in rail fares in line with today’s RPI will put further pressure on the consumer pocket, leaving all concerned with less to spend and invest,” said Mike Cherry, national chairman at the Federation of Small Businesses. “The Government should consider whether this inflationary measure is fit for purpose in the 21st century.”

The RPI is not updated to stay in line with consumer spending in the same way as CPI. “We know there will be a focus on the RPI this month, but the national statistician has been clear it is not a good measure and we do not recommend its use,” said James Tucker, the ONS’S head of consumer price inflation.