Fears of high inflation have reduced after CPI reached its 2% targeted expectations, but commentators have warned of the potential for the rate to tick up again in the future.
The consumer price index (CPI) slowed down from 2.5% in June to 2% in July, according to figures from the Office for National Statistics (ONS). Analysts had estimated it to be 2.3%.
The CPI which includes housing costs rose by 2.1% in the last 12 months, down from 2.4% in the 12 months to June. This is the first time UK inflation has fallen back to 2% since April.
Clothing, footwear and recreational goods propelled the downward contribution to the 12-month inflation rate between June and July 2021.
Neuravest Research CEO of market analysts Erez Katz said the brakes had been “slammed” on inflation in the UK.
“This will support the UK’s economic recovery and could, in large part, be due to widespread easing of supply chain constraints and the passing of an initial spending boom following the nation’s unlocking.”
Both the Bank of England and markets had expected Britain’s rapidly heating economy to endure high inflation for some time, said Financial Markets Online director James Bentley.
“As average wages rise steadily and employers scramble to recruit enough staff, further rises in consumer prices seemed assured,” he added. “Instead, the clouds have suddenly parted, and the annual pace of CPI has dipped back down to the bank’s 2% target.”
As inflationary pressure eases, Bentley said the Bank of England is likely to leave interest rates at a record low – the lowest it has been for 300 years – to drive economic growth.
Cooled inflation rate is a ‘recess not a reversal’
You Asset Management CEO Derrick Dunne (pictured) said although ‘freedom day’ and summer sales were a major driving factor in consumer appetite, the threat of inflation has not yet subsided.
“Much to the relief of monetary policy-makers, the UK’s red-hot price inflation has somewhat cooled for the first time since February,” he said. “But although this undoubtedly eases pressure on the Bank of England, its economists will know that this is merely a recess, not a reversal.”
He added: “Today’s data is a welcome reminder that the danger is transitory, but with a possible peak as high as 4% this year, a defensive rate rise is still to be expected. Savers and investors should continue to prepare for that eventuality, while ensuring that their plans make the most of the recovery.”
The National Institute of Economic and Social Research (NIESR) revised its growth forecast for 2021 by 1.1 percentage points to 6.8%, which is more aligned with recent forecasts from BoE and the International Monetary Fund.
NIESR deputy director Hande Kucuk said that the Monetary Policy Committee should normalise its monetary policy stance and “clearly communicate how Bank Rate and asset purchases will be adjusted in response to higher inflation”.
Sterling is volatile against the dollar
Wednesday’s CPI reading is not likely to help sterling against the dollar.
“The bank already had no plans to raise rates until next year at the earliest, but that timeline may now even be extended,” said Bentley. “For UK equities this is cause for celebration, for the pound not so much.
“Sterling has so far had a rocky week against both the dollar and the euro, and that run is now likely to extend.”
Konzeoue says that sterling, alongside most other G10 currencies, is “on the backfoot” due to global Covid-19 outbreaks which are “causing a flight to traditional safe havens”.
