Increase In Inflation In June

In June, consumer prices decreased by 0.2% over the month, but CPI inflation rose to 2.9%. It may remain high in the coming months and thus exceed the central bank’s 2% target for price stability. However the government offered more flexibility to the BoE to pursue an accommodative policy until the economic situation improves significantly.

Consumer prices were down by 0.2% m/m in June, but CPI inflation rose to 2.9% (after 2.7% in May). After reaching its lowest level since September 2012 in April (to 2.4%), inflation was still at the levels observed at the beginning of the year. However inflation remained however lower than the 3% upper limit. It means that Mark Carney won’t have to write an open letter to the Chancellor explaining why inflation has increased to such an extent and what the Bank proposes to do to ensure inflation comes back to the target.

According to the ONS, the largest downward pressure came from air transport as air fares fell by 2.8% on the month this year compared with a rise of 7.4% in 2012. By contrast inflation increased in line with base effects in clothing & footwear (+3% y/y) and motor fuels sectors where prices sharply fell in June 2012. Upward pressures in clothing sector may be explained by different timing for sales in the clothing sector last year. Core inflation also slightly rose (to 2.3%).

CPIH, which includes owner occupiers’ housing costs increased in June (to 2.7%, after 2.5% in May). RPIJ, which is an improved variant of the Retail Prices Index (RPI) calculated using formulae that meet international standards, rose to 2.7%, up from 2.5% in May.

Inflation should remain high in the coming months as the rise in administrated and regulated prices should still underpin inflation. Moreover there should be still positive pressures from the fall in sterling. Inflation will thus remain well above the central bank’s 2% target. However at the occasion of the 2013 budget statement of 20 March, the government offered more flexibility to the BoE to pursue an accommodative policy until the economic situation improves significantly. Moreover inflation should begin to ease at the end of the year. Indeed there should be downward pressure from labour costs as the pace of increase in regular pay growth excluding bonuses slowed over the past months (+0.9% y/y in the three months through April). In addition, external pressures may ease.

BY Catherine STEPHAN

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