UK inflation slows more than expected to 2%

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UK inflation updates

UK inflation slowed more than expected in July as price growth for clothing, footwear and recreational goods eased, but it was forecast to pick up again over the rest of the year.

The price of consumer goods and services rose at an annual rate of 2 per cent in July, slower than 2.5 per cent in the previous month, according to figures released by the Office for National Statistics on Wednesday.

The slowdown was marginally stronger than the dip to 2.1 per cent forecast by the Bank of England and sharper than the decline to 2.3 per cent expected by economists polled by Reuters.

“The fall in year-on-year inflation last month masks the strength of inflationary pressures currently within the UK economy,” said Yael Selfin, chief economist at KPMG UK.

The “tumble” in July’s UK inflation “feels remarkably like the calm before the storm”, said James Smith, economist at ING.

The ONS attributed almost half of the slowdown to “base effects” linked to rising prices in the corresponding period last July, when many services reopened after the first Covid-19 lockdown and clothing, restaurant, hotel and furniture prices rose.

The statistics office added that some of this July’s slowdown came from products and services, such as foreign travel, where real prices were used last year but had to be estimated this year. Many holidaymakers have chosen to stay in the UK rather than travel abroad this summer because of pandemic restrictions.

Line chart of Annual % change on consumer price index showing UK inflation slows in July

Lower clothing price growth was partially offset by a sharp rise in the price of second-hand cars. With a global semiconductor shortage affecting production of new cars, the annual price growth rate of second-hand cars jumped to 14 per cent.

“Inflation fell back in July across a broad range of goods and services, including clothing, which decreased with summer sales returning after the pandemic hit the sector last year,” said Jonathan Athow, ONS deputy national statistician for economic statistics.

July’s decline in the headline inflation rate was expected to be temporary, however. The BoE has forecast consumer prices growth to rise to 3 per cent in August and to accelerate to a peak of more than 4 per cent in the autumn.

Economists interpreted July’s rise in the annual rate of input producer prices to 9.9 per cent as a sign that cost pressures were already building in the price pipeline.

Column chart of Annual % change of consumer price index showing Bank of England forecasts UK inflation to rise again after July’s dip

“With firms now having to manage debt repayments, rent arrears, business rates and skills shortages on top of rising prices, the government should move swiftly to mitigate the effects of soaring costs,” said Mike Cherry, chair of the Federation of Small Businesses.

However, the BoE expects inflation to return to the bank’s target of 2 per cent in about two years, as price pressures linked to the economy reopening and supply shortages after weeks of lockdowns subside.

“Barring a surprise surge in underlying wage growth over the winter, we don’t think inflation will be a huge concern for the Bank of England,” said ING’s Smith.

He added that any tightening of monetary policy was unlikely to come before late 2022 or early 2023.

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