UK inflation eased in July in what is widely seen as a blip on its way to double the Bank of England’s target this year. Image Credit: Bloomberg

London: UK inflation eased in July in what is widely seen as a blip on its way to double the Bank of England’s target this year.

Consumer prices fell back to the 2 per cent goal for the first time since April, easing from a 2.5 per cent increase in June, the Office for National Statistics said Wednesday. It’s the first time in four months that inflation rose less than economists had expected.

The slowdown partly reflects a sharp rise in prices in July last year, when some of the restrictions deployed during the first coronavirus lockdown were eased. With the economy mostly reopen except for overseas travel, inflation is expected to accelerate quickly, driven largely by the cost of energy and shortages of both goods and labour. The Bank of England plans to reduce its stimulus to ease pressure on prices.

We expect inflation to accelerate further during the rest of this year, rising significantly above the Bank of England’s 2 per cent target, as supply chains remain under strain faced with a strong rebound in demand

- Yael Selfin, chief economist at KPMG UK

Clothing and footwear prices fell during the summer sale season, which along with a variety of recreational goods and services made the largest downward contributions prices. Fuel prices reached the highest since September 2013.

“The differing patterns of movement restrictions across the last two years have affected headline inflation,” said Jonathan Athow, deputy national statistician at the ONS. “Some of this month’s fall came from products and services, such as foreign travel, where real prices were used last year but have had to be imputed this year.”

Rising raw material prices

Manufacturers felt stronger-than-expected inflation both in the cost of raw materials and for goods leaving factory gates. Input prices rose 9.9 per cent from a year ago in July. That’s more than the 9.7 per cent pace of the previous month, which was revised higher. Output costs rose 4.9 per cent, the highest since December 2011 and more than economists had forecast.

July’s retail price index, which is usually used to set rail fares starting in the following January, stood at 3.8 per cent. That’s more than double the rate of a year earlier. A higher RPI also is driving up the cost of government debt, a big portion of which is linked to the index.

The Bank of England predicts price growth of 3 per cent in August and more than 4 per cent in the final two months of the year. Economists surveyed by Bloomberg are less pessimistic, seeing a peak of 3.6 per cent in the first quarter of next year.

The pickup is set to be driven by global increases in energy and goods prices, mirroring the US where annual inflation is running at over 5 per cent. Crucially, BOE policy makers say the surge is likely to be short lived, though they warn that the strength of economic recovery means some withdrawal of monetary stimulus will be needed to return inflation to target over the next two years.