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.
-
Is travel insurance worth it?Travel insurance can add to the cost of your holiday, but it could be crucial if things don’t go as planned.
-
Leading companies cashing in on India’s growth prospectsOpinion Ewan Thompson, manager of the Liontrust India fund, highlights three companies he thinks are well-positioned to generate attractive economic returns
-
Would a food price cap actually work?Analysis The government is discussing plans to cap the prices of essentials. But could this intervention do more harm than good?
-
UK inflation jumps to 10.4% in FebruaryNews The rate of inflation increased in February following two months of falls, increasing pressure on households and the Bank of England ahead of its interest rate meeting tomorrow.
-
When will UK inflation fall back to the BoE’s target?Advice Inflation has started to slow, but it could remain high for some time as underlying pressures build
-
UK inflation slows to 10.5%News Figures from the Office for National Statistics showed the decrease was largely due to falling fuel prices
-
UK inflation falls to 10.7% but cost of living pressures remainNews CPI is down to 10.7% from last month’s 41-year-high of 11.1%
-
UK inflation hits 41-year high of 11.1%News The rising costs of energy and food have pushed the figure up to its highest level since 1981.
-
What is inflation and how does it affect you?Although we are past the worst of the cost-of-living crisis, the Bank of England recently said price rises could hit 3.7% later this year. What is inflation and how does it impact your personal finances?
-
UK inflation back to 10.1%News UK inflation creeps back to its 40-year high from the summer, driven by rising food costs
