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Inflation falls sharply to 2.6 per cent

City A.M. Tuesday, 18 July 2017 ()
Inflation falls sharply to 2.6 per centInflation slowed dramatically in June as prices of motor fuel and other recreational goods and services slumped, easing pressure on the Bank of England to raise interest rates.

Consumer prices increased by only 2.6 per cent, the Office for National Statistics (ONS) said, with the consumer price index (CPI) and the index including housing costs (CPIH) both showing the same figure.

The fall was far bigger than economists had expected. A poll of consensus expectations had predicted consumer price index (CPI) inflation to remain steady at 2.9 per cent. Inflation has risen steadily since March, while it has not fallen since September last year.

*Read more*: Slowest UK economic growth since 2012 predicted as inflation hits consumers

The fall in inflation will likely tilt the Bank of England's monetary policy committee (MPC) away from a vote for an interest rate hike, after a flurry of interviews by policymakers in recent weeks had put tighter monetary policy on the table.

However, the balance of the committee already appeared to favour holding policy, in line with the views of Bank governor Mark Carney despite a prediction that inflation would rise above three per cent.

The surge in consumer prices in the last year has been driven by the devaluation of sterling by around 13 per cent against the dollar following the Brexit vote last June, but the latest figures suggest that influence may finally be waning, with producer price inflation easing to 9.9 per cent.

In June 2016 consumer price inflation was running at only 0.5 per cent, but the weaker pound has made imported products relatively more expensive. This has gradually fed through into higher prices in the shops for UK consumers.

The rise in inflation and the consequent squeeze on discretionary incomes have raised fears over the consumer spending which drove resilient GDP growth in the immediate aftermath of the Brexit vote. Inflation has far outpaced wages over the past year, which rose by only 1.8 per cent in the year to May.

Growth slowed to 0.2 per cent in the first quarter of 2017, with second-quarter data due to be published next Wednesday.

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*Read more*: Consumer confidence has fallen for the third quarter running
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