Technical ‘bluff’ sees UK 12-month inflation dip in July

ONS figures published this morning (18 August) show the Consumer Prices Index including owner occupiers’ housing costs (CPIH) rose by 2.1% in the 12 months to July, down from 2.4% in the previous month.

Meanwhile CPI rose by 2% in the 12 months to July 2021, down from 2.5% in June.

Transport costs contributed to the largest upward contribution to the CPIH 12-month rate at 0.85 percentage points, while clothing and footwear, and a variety of recreational goods and services, applied the largest downward pressure.

The ONS attributed “around 0.2 percentage points” of the easing in the CPIH rate between June and July 2021 to base effects, “specifically from items that became available again in July 2020 at the end of the first coronavirus lockdown”.

“There were 55 items that became available at that time,” it explained. “The collected prices in July 2020 had an upward effect on the index between June and July 2020, and consequently a downward effect on the change in the 12-month rate between June and July 2021.”

On a monthly basis, both CPIH and CPI were unchanged in July 2021, compared with rises of 0.4% in July 2020.

The easing of inflation growth comes despite recent Bank of England forecasts, which predict the rate will hit 4% by the end of 2021.

Head of fixed interest research at Quilter Cheviot Richard Carter explained that while inflation has “moderated somewhat” compared to the previous month, “this is really a bluff”.

“The inflation moderation is largely as a result of technical factors, primarily the fact that the initial surge in price increases during the early phase of the lockdown last year has now dropped out of the numbers,” he said.

“Inflation will likely haunt policy makers for a little longer as the year progresses.

“While it looks likely that inflation pressures will moderate as we head into next year and the economic bounce-back has had the chance to run its course, there is no doubt that the Bank of England will be itching to scale back its pandemic stimulus programme in the coming months.”

Chief investment strategist at Tilney Smith & Williamson Daniel Casali said that the 12-month rate exceeding the Bank of England 2% target for the third consecutive month amid improving economic growth is likely to push the market to “price in a greater chance that the central bank will raise interest rates over the next 12 to 18 months”.

“Given an expected hawkish tone to be taken by the BoE against its major counterparts, like the Fed and ECB, there is room for sterling to appreciate against the USD and euro,” he added.

“An argument against BoE interest rate increases is that the unemployment rate rises as the government’s job furlough scheme is scaled back. However, that looks a low probability.”

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