UK inflation unexpectedly slows to 2.6% in June


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Reuters

The UK’s inflation rate dropped unexpectedly to 2.6% in June, down from 2.9% in May, official figures have shown.

It is the first fall in the rate since October 2016 and was largely down to lower petrol and diesel prices.

Fuel prices fell for the fourth month in a row in June, according to the Office for National Statistics.

However, inflation is still running ahead of average wage inflation, which stands at 2% excluding bonuses.

The UK inflation rate has risen sharply since the referendum on membership of the European Union last June, partly due to an increase in the cost of imported goods following the fall in the value of the pound.

That rise has put pressure on the Bank of England to raise interest rates, but economists say the latest figures will ease that pressure.

“These numbers are a real surprise, showing the first drop in inflation since autumn 2016,” said Lucy O’Carroll, chief economist at Aberdeen Asset Management.

“This is going to kill the chances of a rate rise in the short term. We’ll learn more about the Bank of England’s thinking in a couple of weeks, but we can expect the calls for a rate rise to reduce to a whimper.”

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But June’s fall in inflation is a blip, according to some economists.

“We have not necessarily passed the peak of inflation,” said Andrew Sentance, senior economic adviser at PwC.

“Oil prices are volatile and could bounce back later this year. Meanwhile, the big fall in the value of the pound since last summer is still working its way through the pipeline and has not yet fully fed through into shop prices.”

Another measure of inflation, the Retail Price Index (RPI), edged lower from an annual rate of 3.9% in May to 3.8% in June. RPI is used to calculate the interest rate for student loans, for example.

The ONS also reports a version of consumer price inflation that includes housing costs known as CPIH. That rate fell to 2.6% in June from 2.7% in May.


Analysis: Andy Verity, BBC economics correspondent

Given the increase in the inflation rate over the past few months, it makes a refreshing change to get a loosening of the squeeze on living standards rather than the opposite.

Inflation is still outrunning earnings, but economists had feared that the rate could reach 3%. Among the factors you can thank for that respite is a dip in fuel prices between May and June.

The data also somewhat undermines a shift in opinion among Bank of England policy makers to begin increasing interest rates sooner rather than later.

Those who have said the recent spike in inflation is likely to be a temporary, one-off effect will draw comfort. If you happen to be a householder paying a mortgage, the financial markets are in any case anticipating that rates will rise only slowly.


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