Is this a temporary blip before prices resume their climb higher, or were price inflation fears overstated?
The latest official figures show a slowdown in rising price inflation, with the Consumer Prices Index (CPI) measure slowing from 2.5% in the year to June to 2% in the year to July.
According to the Office for National Statistics (ONS), transport contributed the most significant upwards pressure on price inflation last month, as lockdown measures eased and we started moving around the country again.
However, the fuel price eased slightly in July, rising by 0.36% compared to the 0.41% rise a month earlier.
Another upwards contributor was the cost of second-hand cars, rising in price compared to falling a year earlier.
Other downwards contributions to the latest inflation figures were the cost of clothing and footwear, while recreational goods and services also fell.
Clothing and footwear have been a consistently negative contributor to price inflation figures since March 2020. The prices for these items turned positive in May this year because of the comparison with lower prices at the start of the first lockdown in 2020.
The National Institute of Economic and Social Research (NIESR) forecast earlier this month that price inflation will continue to rise before reaching a peak of 3.9% in 2022. On that basis, these latest price inflation figures could prove to be a temporary reprieve during an otherwise inflationary environment.
However, the NIESR also believes that inflation will fall towards the Bank of England target of 2% in 2023, once the Bank has put up interest rates.
Richard Carter, Head of Fixed Interest Research at Quilter Cheviot, said:
In normal times just one breach of the Bank of England’s 2% target would set alarm bells ringing. But clearly these aren’t normal times. A 2% CPI reading means we’ve now had three consecutive months where CPI inflation has either hit or gone beyond the bank’s target, but yet markets and policy makers remain relatively calm.
This is because policy makers – so far – have faith in the transitory narrative. They remain of the view that this bout of price increases will fade as the economy returns to normal. Indeed, inflation has moderated somewhat from the 2.4% figure posted last month. But this is really a bluff.
The inflation moderation is largely as a result of technical factors, primarily the fact that the initial surge in price increases during the early phase of the lockdown last year has now dropped out of the numbers.
Inflation will likely haunt policy makers for a little longer as the year progresses. The Bank of England expects CPI to hit 4% by the end of the year, and this week’s buoyant wage growth data will only reinforce that view.
While it looks likely that inflation pressures will moderate as we head into next year and the economic bounce-back has had the chance to run its course, there is no doubt that the Bank of England will be itching to scale back its pandemic stimulus programme in the coming months.
