Unexpected inflation fall ‘could kill off rate rise’

Turning to the actual numbers, the annual inflation rate stood at 2.6% in June, below the expected 2.9% which also coincided with the near four-year high from the previous month.

The ONS’s preferred measure of inflation – the Consumer Prices Index including owner occupiers’ housing costs (CPIH) – also fell to 2.6 per cent in June compared with 2.7 per cent in May.

Recreational and cultural goods, which includes computer games, was also driving overall prices lower after dropping by 0.1% on the month following a rise of 0.6% over the same period a year ago.

The figure marks the largest monthly recorded fall since February 2015, and was attributed largely to falling petrol and diesel prices. Low inflation is one reason for the Fed to move cautiously with interest-rate increases, though officials say the phenomenon is likely to fade.

GBP/USD fell 100 pips on the much weaker drop in prices, however, we believe that weaker inflation is actually good news for the pound once the dust has settled, as it eases pressure on United Kingdom spenders, which could be a boon for consumption down the line.

“Going forward the oil price, which has been largely range bound for the past year, is less likely to have a significant impact on inflation”, Lowcock continued.

However, Maike Currie, investment director for personal investing, warned that investors need to focus on the longer-term picture before celebrating the fall in CPI between May and June alone.

Britain’s workers have been caught in the middle of higher costs of food, clothing and services while being squeezed on the other side by stagnating wage growth.

Meanwhile, Andrew Sentance, senior economic adviser at PwC, warned that the United Kingdom has not necessarily passed the peak of inflation. However, there are concerns over core inflation, which excludes volatile food and fuel prices. However, despite this fall, there is gathering consensus that it could rise again in the second half of this year.

The figures from the Office of National Statistics will provide some welcome respite to households, as it will ease the squeeze on the cost of living, although prices are still rising faster than wages.

That was also below the Reserve Bank of New Zealand’s forecast, sending the local dollar down as low as $0.7261.

“Small firms are still absorbing the shock of April’s delayed business rates revaluation”.

However, it’s bad news for savers.

“Perhaps the bigger issue is the relationship between prices and wages in the UK”.

Suren Thiru, head of economics at the British Chambers of Commerce seemed less convinced we have hit a real turning point.