UK inflation came in at 2% in the 12 months to July 2021, falling from last month’s 2.5% figure, data from the Office for National Statistics (ONS) shows.
The 2% rise in the Consumer Prices Index (CPI) measure of inflation was below the broad consensus estimate of 2.3% and means that it has exactly hit the Bank of England’s (BoE) target rate, after two consecutive months above.
Annual inflation has eased slightly from the spikes of the last few months
Source: Office for National Statistics – Consumer price inflation
The ONS said that price falls in clothing, footwear and recreational goods and services contributed the most to the slowdown in inflation.
Increases in prices for second-hand cars were the largest contributors to inflation, compared to price falls a year ago.
Richard Carter, head of fixed interest research at Quilter Cheviot, said: “In normal times just one breach of the Bank of England’s 2% target would set alarm bells ringing, but clearly these aren’t normal times.
“A 2% CPI reading means we’ve now had three consecutive months where CPI inflation has either hit or gone beyond the bank’s target, but yet markets and policy makers remain relatively calm.”
This is because policy makers still have faith in the narrative that inflation will be transitory.
The Bank of England has told the public that it believes the recent bouts of inflation will fade as the economy goes back to normal - but Carter warned that the lower inflation rate this month is merely a “bluff”.
“The inflation moderation is largely as a result of technical factors, primarily the fact that the initial surge in price increases during the early phase of the lockdown last year has now dropped out of the numbers,” he explained.
“Inflation will likely haunt policy makers for a little longer as the year progresses. The Bank of England expects CPI to hit 4% by the end of the year, and this week’s buoyant wage growth data will only reinforce that view.”
Jai Malhi, global market strategist at J.P. Morgan Asset Management, also warned that even though today’s fall in UK inflation was greater than expected, it was “unlikely to push the Bank of England off course from tightening policy next year”.
She said: “The UK looks to be a test case for the rest of the world with a high vaccine uptake and almost all economic restrictions lifted.
“If cases remain under control and the recovery broadens into services then the Bank of England won’t be put off by today’s softening of inflation.”
The strategist expected the Bank of England to be the first major central bank to raise rates in the second half of next year.
Official Bank of England rate over past 10 yrs
Source: Bankofengland.co.uk
Danni Hewson, financial analyst at AJ Bell, also said that markets and policy makers were not quite out of the woods yet, pointing to the supply chain issues that are plaguing many corporates.
She said: “The prices paid and charged by factories are still going up and shortages and shipping costs will make the next few months a rather expensive business for importers.
“Then there’s yesterday’s jobs numbers and wage hikes which must be carefully considered as part of the whole,” she added.
“If people have more to spend, they might be prepared to keep spending just that little bit more and businesses might need to push up prices to cover their costs, creating a lovely muddy circle. Yes, July has brought a surprising bit of breathing space, but this inflationary story doesn’t seem to have quite run its course.”
However not all were as cautious over the recent dip in inflation figures. Charles Hepworth, investment director at GAM Investments, said the latest inflation print might be a signal to the end of building inflation pressures.
Despite most of the coronavirus restrictions being lifted last month, he said the surge in consumer activity hasn’t translated yet into runaway inflation pressures.
“If the UK experience is reflective of what is happening in America, then retail sales may also be shifting lower and this will naturally put a lid on higher price pressures building,” he explained.
“The Bank of England certainly will be sleeping easier with this latest inflation trend, despite expecting it to move higher over the next few quarters.”