UK inflation stable at 2.6 per cent in July

Consumer price inflation remained stable last month at 2.6 per cent, again keeping it below May’s peak of 2.9 per cent.

However, consumers continue to face a considerable squeeze on their purchasing power with inflation of 2.6 per cent in July still clearly above earnings growth, which will likely be close to 2 per cent.

Meanwhile, muted producer output prices in July and a further easing back in the year-on-year increase in input prices point to easing inflationary pressures down the price chain.

The latest figures suggest that UK inflation will dodge reaching 3 per cent in the latter months of this year, although it may well edge a little higher in the near term as sterling’s past sharp drop may not have fully fed through.

Following today’s news, analysts at global accountancy firm EY said they now doubt that there will be any interest rate hike until at least late on in 2018, and it could well be delayed until 2019.

Howard Archer, chief economic advisor to the EY ITEM Club, said: “There is now a very real chance that UK inflation will dodge reaching 3 per cent in the final months of the year, although there could be a limited rise in the near term as sterling’s past sharp drop may not have fully fed through. However the risk of inflation going markedly above 3 per cent looks to have been diluted by sterling firming from its early-2017 lows and oil prices softening. Ongoing muted earnings growth and slowing UK economic activity are also keeping a lid on domestic price pressures.”

Mr Archer went on to predict that developments in the economy over the summer are also likely to see the Bank of England push back any plans to raise interest rates.

He said: “We believe it is highly unlikely that the BoE will raise interest rates in 2017, with growth likely to remain lacklustre over the second half and with inflation looking close to peaking and likely to fall back appreciably in 2018.

“We have pencilled in one interest rate hike to 0.5 per cent late on in 2018, but this is far from certain. It is partly based on the assumption that there will eventually be an agreement on a Brexit transition period that helps the economy improve later on in 2018. We certainly would not be surprised if interest rates remained at 0.25 per cent going into 2019.”