UK inflation falls in July but consumers still under pressure

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Inflation fell in July but remains well in excess of pay rises for the average British worker, leaving many households struggling with falling incomes.

The consumer price index (CPI) measure of the cost of living remained well above the Bank of England's government-set target, at 2.8%, while the broader retail price index, the measure of inflation used to set rail fares, was 3.1%. This means rail passengers now face fare rises of more than 4% in the new year.

Official statistics showed the retail price index (RPI) measure of inflation used to set fares as well as many pay deals eased to 3.1% in July from 3.3% in June. Both measures far outstripped average pay growth.

The Office for National Statistics (ONS) said CPI fell to 2.8% from 2.9% in June, as forecast by economists. The slowdown will bolster expectations that inflation is now heading lower after being above its 2% target for several years. Some economists predict it could be back at 2% by the end of the year.

July's fall was 'likely to presage the start of a sustained drop', said Martin Beck at Capital Economics.

'Other indicators point to further falls in inflation ahead. For example, producer prices figures also released today confirmed that price pressures at the very start of the inflation pipeline remain subdued. Looking forward, although there are growing signs of economic recovery, we think the degree of slack in the economy will help push down CPI inflation close to the monetary policy committee's 2% target by the end of the year.'

The ONS said the slowdown in inflation came as higher petrol prices were outweighed by airfares rising less than a year ago and prices in the recreation and culture sector falling. There was also downward pressure on inflation from clothing, with prices dropping by more than a year ago.

Tuesday's official inflation numbers will be used to calculate January's rail fare rises across the network based on the formula of RPI plus one percentage point. That means regulated fares will likely rise by more than 4% at the start of 2014, adding more than £200 to the annual price of commuters' tickets in the south-east of England.

That will put further strain on workers contending with the biggest squeeze on living standards for decades as pay rises fail to keep pace with rises in the cost of living. Average pay growth stands at 1%, according to the ONS.

'This slightly eases the squeeze on consumers' purchasing power, although it currently remains appreciable given that inflation is still running nearly three times above underlying annual average earnings growth,' said Howard Archer, economist at IHS Global Insight.

'Looking ahead, consumer price inflation may yet touch 3.0% in the near term given difficult near-term base effects and recently firmer oil prices ... but it should start heading gradually down towards the end of the year.'

This latest easing in inflation will bring reassurance to the Bank of England and new governor Mark Carney, who last week vowed to keep interest rates at their record low.

The Bank's latest forecasts are for inflation to remain above its 2% government-set target until the second half of 2015. But Carney has signalled borrowing costs will remain unchanged until well after the 2015 general election, stressing that only a big fall in unemployment would bring an end to the cheap money of the past four years. The governor said he would wait until the jobless rate lowered to 7% before considering whether to push up rates. That milestone is probably a long way off and official labour market data published on Wednesday are expected to put unemployment at 7.8%.

Powered by Guardian.co.ukThis article was written by Katie Allen, for theguardian.com on Tuesday 13th August 2013 10.22 Europe/London

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