CPI inflation falls to 1.6%. Pound falls as rate rise now seen as very unlikely this year

19th August 2014

img

The Consumer Prices Index (CPI) grew by 1.6% in the year to July 2014, down from 1.9% in June according to the Office for National Statistics. Falls in clothing prices provided the largest contribution to the fall in the rate. Other falls included alcohol, financial services and food & non-alcoholic drinks product groups. The largest rise was seen in transport costs.

Rail fares

Rail fares across the country are also in line to rise by 3.5% this year, after the retail prices index (RPI) eased to 2.5% last month, from 2.6% in June. This measure of inflation is no longer classed as an official statistic by the ONS, but is still used to set fare increases. Regulated rail fares for 2015 are due to increase by RPI plus one per cent. However, some rail fares could rise by an extra 2 per cent, meaning certain routes could increase by up to 5.5%.

Currency

Tony Wilson, head of strategy at the foreign exchange specialists FEXCO, says: “Inflation speaks louder than words. In a week where the currency markets were primed to scour the MPC minutes for clues to the future of interest rates, today’s surprisingly large fall in CPI offered more concrete insight into the likely course of the Bank of England’s monetary policy.

“With CPI now comfortably below its 2% target, the Bank has no need to use interest rates to tame inflation. Despite the contradictory messages given by Governor Carney, the doves clearly still rule the roost.

“While house price rises remain a worry, the prospect of an interest rate rise this year is now firmly off the table – with many predicting that the hike may not come until the second quarter of 2015.

“The runes of tomorrow’s MPC minutes will add more detail, but for now the markets’ assumption that rate rises are once again in the long grass has sent Sterling down across the board.”

More space for Bank of England

Towry Law head of investment Andrew Wilson says: “Today’s unexpectedly weak inflation figures are due to both the current strength of sterling and tough times on the High Street. While house prices continue to rise and have hit a record average of £265,000, the pace of house price increases is decreasing, which is good news. The fall in inflation will give Mark Carney and the Bank of England more breathing space in terms of pushing up interest rates, and will soften sterling”.

Families need to have found an extra £406 this year

Aston Goodey, sales and marketing Director, MGM Advantage says: “Each household will typically need to spend an extra £406 a year to maintain their standard of living compared to a year ago.

‘The inflation yo-yo continues to play havoc with peoples finances at a time when many have already made cutbacks to makes ends meet. We will continue to see a fall in living standards until pay rises match inflation.

“Older generations are living longer, and face the challenge of ensuring their savings last the distance while trying to maintain a standard of living. The corrosive effects of inflation could halve incomes over a 25-year retirement3. This is why it is important you think about your income options to try and maintain your standard of living.”

Leave a Reply

Your email address will not be published. Required fields are marked *