The move was driven largely by a lower-than-expected fall in the contribution of clothing and footwear which added 0.14% to the figure, as stores cut prices by less than last year during the summer sales.
As the ONS said: “prices, overall, fell by 3.4% between June and July this year compared with a larger fall of 5.7% between the same two months a year ago.”
Pointing out that prices always fall between June and July as a result of the summer sales, it added that the 2015 number was actually more in line with recent years, while the 2014 period was larger than average following an ”atypical price increase between May and June 2014”.
The implication of the move however, was that core inflation, which strips out volatile elements such as food and fuel (which have also been the primary weights on inflation in recent months) rose from 0.8% to 1.2%.
Ben Brettell, Hargreaves Lansdown senior economist, said this rise in core inflation suggests that underlying inflationary pressures could be building and provide the “clearest indication yet” that the Bank of England might have to raise rates sooner rather than later.
But, while Brettell believes the number today will increase speculation that the Bank may move to raise rates later this year instead of next, it is unlikely to happen.
“It will take some time for more MPC members to be persuaded to vote for higher rates, and I still think early 2016 is more likely. Thereafter the path of rate rises is likely to be a slow incline, and it wouldn’t surprise me to see them stuck on 0.75% for some time.”
Schroders senior European economist, Azad Zangana, agrees that the numbers surprised on the upside, but remains of the view that the BoE is unlikely to hike rates before CPI returns to at least 1%, which, he says, “may not happen before the second quarter of 2016″.
For Adam Chester, head of economic research & market strategy at Lloyds Bank Commercial Banking, while the move confirmed market expectations that UK interest rates could rise in the first half of 2016, he said the BoE was unlikely to read too much into one month’s data.
But, he added: “the pickup in the core rate is a timely reminder that not all indicators of inflation are pointing south.”
