Unexpected fall in inflation rate

The rate of inflation in the UK fell more than expected in July, as the cost of clothing, footwear, food and non-alcoholic drinks eased, according to figures released today (August 19) by the Office for National Statistics (ONS).

Price rises, as measured by the Consumer Prices Index (CPI) dropped to 1.6 per cent in July from 1.9 per cent in June, confounding analysts, who had been expecting a reading of 1.8 per cent.

CPI inflation has now been at or below the Bank of England’s target for eight consecutive months, allowing its Monetary Policy Committee to keep interest rates at their historic rate of 0.5 per cent for longer. However, the news had an adverse effect on the value of the pound, which fell almost a cent against the dollar.

The ONS attributes the sharp fall in inflation to deeper discounts in shops between June and July, although it added that the sharper fall in prices this year was also due to the later timing of the summer sales. Prices on the high street fell by 5.7 per cent between June and July this year compared with only 3.2 per cent in 2013, while food prices fell by 0.4 per cent.

Meanwhile, the Retail Prices Index (RPI) measure of inflation also eased down last month, to 2.5 per cent, from 2.6 per cent in June. The RPI is no longer classed as an official statistic by the ONS but is still used to set fare increases, which are in line to rise by 3.5 per cent this year, as the formula is for prices to rise by RPI plus 1 per cent.

However, under a “flex” rule, train companies can raise fares by 2 per cent above the average, as long as the overall average stays at RPI plus 1 per cent. This means that some fares could rise by as much as 5.5 per cent next year.