Consumer prices grew by 1.6% in the year to July 2014, down from 1.9% in June. The main reason was a shift in the timing of the summer sales. Prices for clothing and footwear were 0.2% lower from a year earlier. In June, the year-on-year price change was 2.4%.
Also price increases for food and beverages eased due to fierce competition between supermarkets for market share. By contrast, transport prices added 0.07 percentage point to the overall inflation rate, due to higher prices for passenger cars.
The moderate inflation rate is partly due the surprising weakness of wage growth. Even though unemployment has come down – in the three months to June the unemployment rate declined to 6.4% – average weekly earnings growth has been slowing. This could be due to a shift in workforce composition towards more junior staff.
Also the strengthening of sterling has a dampening effect on prices. In the year to July, the pound appreciated 10% against the dollar. This has an immediate effect on fuel prices. In July, petrol prices were 3% lower from a year earlier. The Bank of England estimates that the appreciation of sterling over the past year should reduce the level of UK import prices by around 6%, all else equal. To date, around half of this effect has come through. These lower import prices should gradually feed through into CPI inflation. Once the passthrough is complete, UK consumer prices will be around 2% lower than otherwise would be the case.
Inflation is expected to gradually increase, as spare capacity is eroded. The Bank of England expects inflation to remain a little below 2% for the next couple of years. In our opinion, inflation could already reach 2% in early 2015. In this context, we expect the Bank of England to start raising Bank Rate before the end of the year.
BY Raymond VAN DER PUTTEN
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