UK inflation falls to 2%. A temporary dip or a longer-term trend?

Prices across the UK rose by 2% in the year to July. Saloni Sardana looks at what's behind the rise, and asks if it's just s short term dip.

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. 

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.

Recommended

Britain’s ten most-hated shares – w/e 1 July
Stocks and shares

Britain’s ten most-hated shares – w/e 1 July

Rupert Hargreaves looks at Britain's ten most-hated shares, and what short-sellers are looking at now.
4 Jul 2022
Britain’s most-bought shares w/e 1 July
Stocks and shares

Britain’s most-bought shares w/e 1 July

A look at Britain’s most-bought shares in the week ending 1 July, providing an insight into how investors are thinking and where opportunities may lie…
4 Jul 2022
M&G offers a solid 10.1% yield – but future growth is uncertain
Share tips

M&G offers a solid 10.1% yield – but future growth is uncertain

Financial services group M&G has one of the highest dividend yields in the FTSE 100. But it’s a complicated company, and a tough one to analyse, says …
4 Jul 2022
We’re doing well on pensions – but we still need to do better
Pensions

We’re doing well on pensions – but we still need to do better

Pensions auto-enrolment has vastly increased the number of people in the UK with retirement savings. But we’re still not engaged enough, says Merryn S…
4 Jul 2022

Most Popular

Ray Dalio’s shrewd $10bn bet on the collapse of European stocks
European stockmarkets

Ray Dalio’s shrewd $10bn bet on the collapse of European stocks

Ray Dalio’s Bridgewater hedge fund is putting its money on a collapse in European stocks. It’s likely to pay off, says Matthew Lynn.
3 Jul 2022
UK house prices are definitely cooling off – but are they heading for a fall?
House prices

UK house prices are definitely cooling off – but are they heading for a fall?

UK house prices hit a fresh high in June, but as interest rates start to rise, the market is cooling John Stepek assesses just how much of an effect h…
30 Jun 2022
Persimmon yields 12.3%, but can you trust the company to deliver?
Share tips

Persimmon yields 12.3%, but can you trust the company to deliver?

With a dividend yield of 12.3%, Persimmon looks like a highly attractive prospect for income investors. But that sort of yield can also indicate compa…
1 Jul 2022