Inflation to ease rate rise fears

Tuesday 15 July 2014

Britain's longest stretch of low inflation for nine years is expected to be confirmed when official figures are published today.

The Consumer Price Index (CPI) measure of inflation is predicted to have edged up to 1.6% in June after a falling to a four-and-a-half year low of 1.5% in May. But it should mean CPI has been at or below the Bank of England's 2% target for seven months in a row.

It will be the first time this has happened since June 2005 - which was the last month of a low-inflation stretch that had lasted several years from 1997. The extended period of subdued cost-of-living rises eases pressure on Bank of England policy makers to hike interest rates from their historic lows - though it will come as little comfort to workers after average pay growth slumped to 0.7%.

Latest inflation figures from the Office for National Statistics (ONS) come as Bank governor Mark Carney prepares to face MPs on the Treasury Select Committee over measures to designed to guard against an overheating housing market.

Supermarket price wars helped CPI dip to 1.5% in May, with a 0.6% year-on-year decline in food and non-alcoholic drinks prices which was the first in eight years and the heaviest since October 2004. But the fierce competition in the grocery sector is not expected by analysts to have had such a pronounced effect this time.

Scotiabank's Alan Clarke said there had been no more specific price announcements from retailers that were expected to take effect in the period. Meanwhile alcohol prices were being pushed up to offset the hit to supermarket margins, he added.

Investec's Philip Shaw said clothing and footwear would create "modest" upward pressure on inflation with the warm weather meaning little need for discounting.

Furniture prices were also expected to have pulled CPI in this direction, with the latest data comparing to a period last year when there had been a large decline.

Inflation has been sliding downwards since hitting 2.9% last June.

Howard Archer, chief UK and European economist at IHS Global Insight, said it looked likely to be contained by the strong pound - which makes imports cheaper - and supermarket price battles.

"While consumer price inflation may bottom out around 1.5%, it looks highly likely to stay under 2% for the rest of 2014 and probably beyond," he said.