Inflation as measured by the UK Consumer Price Index fell to 1.6% during July, down from 1.9% in June. This is the seventh month in a row that the measure has been below the Bank of England’s central target of 2.0%.

The largest contribution to the fall in the rate came from the clothing sector. Retailers usually drop prices around June to clear unsold inventory; this trend was seen slightly later this year and contributed to a low July reading. Prices of alcohol, financial services and food products have also helped to move the rate downward, while transport provided an offsetting upward effect.

Soft inflation is generally good news for consumers especially in a period of weak wage growth. Wage data last week showed a 0.2% yearly fall in wages over the three months to June. High inflation would imply that purchasing power would fall on top of the reduction in the cash value of people’s wages. Less encouraging for living standards was today’s release of the Retail Price Index (RPI) figure, which remained almost unchanged at 2.6% for July. While not an official inflation statistic, its July value sets rail fares: next year’s season tickets will increase by RPI + 1% or in some cases RPI + 3%, as per the formula set by regulation.

A long stretch of below-target inflation increases the likelihood that the Bank of England will raise interest rates in early 2015 rather than this year. Spare capacity, which is the Bank’s stated guiding factor in its decision, is remaining higher for longer than expected. This was demonstrated by the second quarter’s lacklustre wage growth, and underlined last week by the Bank’s estimate of spare capacity in the economy of around 1%, only marginally down from May’s estimate of between 1% and 1.5%.

The recent trend of weak inflation appears to be as much a global phenomenon as a purely UK one. The Eurozone has been falling ever closer to deflation, while the European Central Bank is facing strong Bundesbank opposition to any monetary loosening measures. US inflation data come out later today, but at just 2.1% on the latest reading and expected to be at 2.0% today, the rate is already below the long-term average. In addition, a strong pound means that the UK economy finds imported goods even cheaper. Therefore, recent signals suggest the Bank seems likely to wait until next year before raising the base rate. 

 

UK Consumer Price Index, annual percentage change