UK inflation low but higher than expected

Azad Zangana, Senior European Economist at Schroders, comments on today’s UK inflation figures

Annual UK consumer price index (CPI) inflation rose to 0.1% year-on-year in July, up from zero in June. Although the rate of inflation remains very low, the latest figures did surprise to the upside as the consensus was for no change. Food and energy price inflation continue to drag the figures lower, caused by the slump in global commodity prices.

However, once these are stripped out, core inflation was recorded at 1.2% year-on-year, up from 0.8% year-on-year in June, and higher than consensus expectations of 0.9%.

The latest inflation figures show that lower food and energy prices inflation are masking early signs of an increase in domestic inflation. This is being supported by rising wage growth and greater purchasing power for households offered by falling food and energy prices.

Also in this month’s release, inflation based on the retail price index (RPI) rose 1% year-on-year, unchanged from the previous month. This is good news for rail passengers as the government has pledged to only raise rail fares by RPI next year.  At just 1%, the next fare increases will be considerably lower than those seen in previous years, and should be lower than wage inflation in 2016.

Overall, the latest inflation figures show signs of a healthy economy that is enjoying the dividends from lower global commodity prices. The Bank of England has started to question how long interest rates can remain at current record-low levels, but in our view, is unlikely to hike rates before CPI inflation returns to at least 1%, which may not happen before the second quarter of 2016.”

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