According to the Office for National Statistics, the Consumer Prices Index including owner occupiers’ housing costs (CPIH) 12-month rate fell to 2.6% in June 2017, compared with 2.7% in May 2017.
While the ONS said the drop was largely the result of falling motor fuel prices, core inflation – which takes out the more volatile components such as fuel and food – also fell to 2.4%.
The news of the unexpected decline sent the pound sharply lower as currency traders adjusted their outlook for interest rates.
Ben Brettell, senior economist at Hargreaves Lansdown, said: “The Bank of England’s rhetoric has taken an increasingly hawkish tone in recent week, with Mark Carney himself saying at the end of last month that ‘some removal of monetary stimulus is likely to become necessary’. Chief economist Andy Haldane also indicated he might support a rate rise this year.
“However if today’s pullback in inflation marks the start of a sustained decline, the pressure on the Bank to raise rates will ease.”
Brettell added that the fall in inflation will be welcome news for squeezed households, while if it continues to moderate it could bode well for economic growth.
“The UK economy is heavily reliant on the consumer, and economists had expected falling real incomes to translate into lower retail sales,” he said. “If this fails to materialise the economy could see a stronger second half to the year.”
