Is inflation steadily falling or were yesterday

13th July 2011

However, despite the fall in June's inflation rate, the figures mean the CPI rate has still overshot the Bank of England's 2% target for 35 of the past 41 months, reports the BBC.

Yet an FT blog says: "…Inflation figures give some ammunition to the doves. The fall in CPI inflation to 4.2% in June (from 4.5%) ensures there was no overshoot in inflation in the second quarter relative to the Bank's May inflation report."

The blog concludes that while inflationary pressures have fallen in the second quarter, this was to be expected given VAT did not rise again. "Inflation is not yet in the history books and the running rate remains uncomfortably high.

"There is a risk that the June inflation figure is artificially depressed by retailers starting summer sales earlier than usual. If the quarterly rate does not fall further in the third quarter, inflation hawks will have their day again."

Simon Ward, chief economist at Hendersons and Mindful Money Blogger, says on his blog that he expects this trend to reverse next month: "A post in May suggested that CPI inflation would undershoot the Bank of England's forecast over the next 12 months while remaining well above the 2% target over the medium term. The fall from 4.5% in May to 4.2% in June supports this prediction, although part of the favourable surprise reflects an earlier-than-usual start to summer sales and should be reversed next month."

Azad Zangana, European economist at Schroders agrees with Simon Ward. He said that the lower than predicted inflation rate was "very very temporary" and was due to an early kick-off to the sale season. Next month he believes we will see a pick up – but he doesn't believe inflation is set to rise above 5% by the end of the year. 

Economics editor of the Guardian, Larry King, comments that the falling inflation figure doesn't change the bleak outlook for the economy.

He says: "At first sight, the sharp and unexpected drop in the rate of inflation is unalloyed good news. For months, the financial markets have been fretting about the upward trajectory of the UK's cost of living and have been putting pressure on the Bank of England to raise interest rates in response.

"…Lower inflation will eventually help to underpin consumer spending, but not until growth in average earnings exceeds the annual increase in the cost of living. That process will be delayed by the stonking increases in domestic energy bills which will push inflation back towards 5% over the summer.

"After that, however, inflation is likely to fall rapidly. Oil prices are on the slide amid concerns about the durability of the global economic recovery, while this January's hike in VAT to 20% will not be repeated. A combination of weak demand and downward pressure on prices would put a fresh dose of quantitative easing – electronic money creation – by the Bank of England back on the agenda."

Meanwhile, the Daily Telegraph details analysts reaction to the unexpected dip in UK inflation.

Romeosierra comments on the report: "CPI will go back up again – the utility hikes say it all – 18% ! This will need to come through in th next 6-12 months. Having said that I can see petrol prices stabilising and these will drag the rate of increase in prices downwards as the last 12 months fall out of the figures. I also feel there is loads of downward price pressure in the high street and the VAT increase will drop out next year as well. Its all evenly balanced, but the doves on the MPC will feel vindicated."

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