Prices across the UK rose by 2% in the year to July, according to the latest figures from the Office for National Statistics (ONS), falling short of expectations. CPI was unchanged in July, compared with rises of 0.4% in July 2020.
Why has inflation dipped?
The lower reading was caused by a fall in prices in clothing and footwear, said the ONS, as retailers cut prices and offered summer sales. But this was partially offset by a rise in the price of second-hand cars, which fell last year: “Inflation fell back in July across a broad range of goods and services, including clothing... This was offset by a sharp rise in the price of second-hand cars,” says Jonathan Athow, ONS’ deputy national statistician.
Wednesday’s reading came after UK inflation had jumped to its highest level in three years last month with CPI hitting 2.5% thanks to an increase in the price of food, dining out, and clothing and footwear. So the dip is also related to the fact that price rises were exceptionally high last month.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Britain’s FTSE 100 stockmarket index fell 0.4% on the news, while the pound was 0.2% higher against the dollar at $1.376.
Is this a short-term dip?
Markets have been divided as to whether inflation, which has been rising across several major economies, is transitory or whether it should be a reason to worry and result in an earlier tightening of monetary policy.
“This is good news for those fretting about rising prices but potentially raises some questions about the strength of the UK economic recovery,” says Russ Mould, investment director at AJ Bell.
But Ian Warwick, managing partner at Deepbridge Capital, is less convinced that Wednesday’s lower than expected reading means inflation has cooled off: “While inflation may have slowed slightly to fall within the Bank of England’s target of 2% this does not mean that rates won’t pick up over the coming months,” he said.
Many early-stage businesses will be thriving in the recently reopened economy, but they will keep an eye out for any rise in interest rates as it could limit the amount they can borrow at a pivotal time, he adds.
This view is echoed by other experts: “Inflation stepped off the accelerator in July, but this doesn’t mean we’re set for a gentle ride, because it owes an enormous amount to an artificial bump in prices a year earlier. The underlying pressure on prices, particularly from soaring petrol and second-hand car prices, mean it’s set to pick up speed again soon, and may well hit 4% by the end of the year,” warns Sarah Coles, personal finance analyst at Hargreaves Lansdown.
-
House prices are falling in London but how does it compare to the rest of the UK?Advice The capital remains the most expensive part of the UK to buy a property, but it isn’t being as badly hit by the housing market slump. Where are London house prices heading?
-
Will a Santa Rally provide festive cheer for investors this year?
News Equities often get a seasonal boost during December - will there be a Santa Rally in 2023?
-
UK wages grow at a record pace
The latest UK wages data will add pressure on the BoE to push interest rates even higher.
-
Trapped in a time of zombie government
It’s not just companies that are eking out an existence, says Max King. The state is in the twilight zone too.
-
America is in deep denial over debt
The downgrade in America’s credit rating was much criticised by the US government, says Alex Rankine. But was it a long time coming?
-
UK economy avoids stagnation with surprise growth
Gross domestic product increased by 0.2% in the second quarter and by 0.5% in June
-
Bank of England raises interest rates to 5.25%
The Bank has hiked rates from 5% to 5.25%, marking the 14th increase in a row. We explain what it means for savers and homeowners - and whether more rate rises are on the horizon
-
UK wage growth hits a record high
Stubborn inflation fuels wage growth, hitting a 20-year record high. But unemployment jumps
-
UK inflation remains at 8.7% ‒ what it means for your money
Inflation was unmoved at 8.7% in the 12 months to May. What does this ‘sticky’ rate of inflation mean for your money?
-
VICE bankruptcy: how did it happen?
Was the VICE bankruptcy inevitable? We look into how the once multibillion-dollar came crashing down.
