Bank of England to hold rates

Wednesday, 19 Jul, 2017

The Office for National Statistics (ONS) reported the largest monthly drop in United Kingdom inflation since February 2015 as the Consumer Prices Index including owner occupiers' housing costs (CPIH) fell to 2.6% in June, compared with 2.7% in May.

The latest United Kingdom inflation figures will ease pressure on both the Bank of England and squeezed households; however, the surprise drop to 2.6 per cent could also indicate worryingly lower demand for non-essential services as consumer wages take a hit.

Fuel prices fell by 1.1% between May and June compared with 2.2% previous year.

"Consumers felt some respite from the inflation squeeze last month, but price rises are still likely to run ahead of wage increases for the rest of this year - continuing the current consumer squeeze and holding back economic growth", he added.

The results bear significance as they will take some of the pressure off the Bank of England to raise interest rates to tackle rising prices.

A rise in food prices, buoyed by a higher vegetable prices, was offset by falling transport prices, the data showed. And if so, what does that mean for living standards and borrowing costs?

"The problem is amplified by both low wages and low interest rates, which give people little opportunity to grow their savings to meet the growing cost burden".

Inflation was expected to remain unchanged at a almost four-year high of 2.9%.

The pound has lost ground ever since the outcome of the referendum was announced and the full economic reality of leaving the European Union has not been totally priced in as March 2019 is a more concrete deadline.

The fall was driven by the lower cost of petrol, after a significant fall in the oil price from mid-May to mid-June.

At 1500 BST, the pound was down 0.3% against the dollar at 1.3023 and a whopping 1.1% weaker versus the euro at 1.1251.

Adrian Lowcock, investment director at Architas, agreed that the inflation figures are good news for households bearing the brunt of rising prices.

At the June rate review, Reserve Bank governor Graeme Wheeler kept the official cash rate at 1.75 per cent and said the bank viewed a recent pickup in inflation as a temporary spike in the tradeables sector. "Therefore, despite today's fall in the inflation rate, real wage growth is still in negative territory".

FXTM research analyst Lukman Otunuga said the fact that sterling sharply depreciated across the board after the inflation data continues to highlight how the currency has become increasingly sensitive to monetary policy speculation.

The BoE has had to deal with an inflation overshoot when the last CPI reading came in 2.9%, above the target rate of 2% and even above the Central Bank's Q4 forecasts for a 2.7% figure at the end of the year.