United Kingdom inflation rate's unexpected drop takes pressure off BoE

Ausiliatrice Cristiano
Luglio 18, 2017

So with United Kingdom inflation confounding forecasters by slipping back to 2.6 per cent in June, can we rule out a rate rise this year and well into 2018, or is this just a temporary respite for squeezed British households?

The pound dropped from a 10-month high versus the dollar as United Kingdom inflation unexpectedly slowed in June, reducing the chances of an imminent interest-rate increase by the Bank of England.

Banks had been revising down their expectations of the annual inflation rate in recent weeks to between 1.8 and 1.9 per cent - but hadn't expected the quarterly rate to drop to zero.

"If inflation continues to moderate, this could bode well for economic growth - the United Kingdom economy is heavily reliant on the consumer, and economists had expected falling real incomes to eventually translate into lower retail sales".

Tuesday morning's easing inflation lowered the likelihood of an imminent rate rise and sent the pound sharply lower as currency traders adjusted their outlook for interest rates.

The data will be key in influencing the ongoing debate surrounding the Bank of England and whether or not now is the time to raise interest rate.

WisdomTree research analyst Nick Leung says inflationary pressures undermining consumers' debt-fuelled spending power is likely to encourage the Bank of England to delay the rate hike cycle "for as long as possible". This was the first fall in the annual rate since April 2016.

"All eyes will be on the Governor of the Bank of England when he unveils the new £10 note later today to see if he gives any indication of the Bank's potential appetite to increase rates".

'The downward surprise in June's inflation print removes some of the hawkish urgency within the Bank, with petrol prices and recreational items being the primary contributors, ' noted Shilen Shah, bond strategist at Investec Wealth & Investment.

The fall was far bigger than economists had expected, pushing down the value of sterling against the U.S. dollar to $1.303 at the time of writing, undoing the gains of the past two sessions.

The fall in the cost of living was largely driven by a slide in fuel and computer game prices, while some upward pressure came from the cost of food, which recorded smaller falls for June compared to the same month a year ago.

'Inflation remains a major risk to the UK's growth prospects this year, with rising cost pressures for both consumers and businesses likely to dampen overall economic activity, ' Thiru added.

Economist Ben Brettell at Hargreaves Lansdown was more optimistic.

Petrol prices rolled back by 1.1p over the period to 115.3p per litre, while diesel also declined by 1.4p to 117.3p.

'But we have not necessarily passed the peak of inflation, ' he continued.

The month-on-month Food and Non Alcoholic Beverages inflation rate stood at -0,45 percent in June 2017, shedding 0,52 percent on the May 2017 rate of 0,07 percent.

Output price inflation fell more-than-expected to 3.3% annually in June from 3.6% in May. "If this fails to materialise the economy could see a stronger second half to the year".

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