Inflation falls to 2.6% in a reversal of expectations

Inflation falls to 2.6% in a reversal of expectations

Inflation has dropped to 2.6 per cent in a shock reversal of expectations prices would continue to rise, new data showed today.

The Office for National Statistics said the headline rate of consumer price inflation was 0.3 per cent lower than a month ago.

Data for May to June 2017 said prices are still rising faster than wages but by less than figures last week suggested.

The data will ease fears about the impact of Brexit on the economy and could postpone further calls for the Bank of England to raise interest rates. 

The Office for National Statistics said the headline rate of consumer price inflation was 0.3 per cent lower than a month ago at 2.6 per cent 

The ONS said cheaper petrol and diesel were among the biggest drivers of the fall in inflation, which is the first recorded drop in 15 months. 

Falling transport costs were the biggest downward driver on the inflation rate, the ONS said.

Car fuel fell by 1.1 per cent between May and June 2017 - compared with a rise of 2.2 per cent in the same month last year. 

Prices for recreation and culture were also down in the latest data.

The fastest rising prices in the economy are for food, non-alcoholic drinks, furniture and household goods. 

A Treasury spokesman: 'While it is encouraging that inflation was lower this month, we appreciate that some families are concerned about the cost of living.

'That's why we have introduced the National Living Wage, which is helping to boost earnings by £1,400 a year, and why we've cut taxes for millions of people to help them keep more of what they earn.

'We are also increasing our free childcare offer to help 400,000 working parents.' 

Data for May to June 2017 said prices are still rising faster than wages but by less than figures last week suggested

The move will ease the pressure on consumers, who have seen their pay squeezed by sluggish wage growth and higher inflation triggered by the Brexit-hit pound.

It comes after annual total pay in real terms sank by 0.7 per cent to its lowest level since the summer of 2014 in the three months to May and fell by 0.5 per cent excluding bonuses over the period.

Jonanthan Athow, ONS deputy national statistician, said: 'Today's fall in inflation is mainly due to drops in petrol and diesel prices. However, the rate remains higher than in the recent past.'

Stephen Clarke, policy analyst at the Resolution Foundation, said: 'The small fall in inflation is good news for struggling households, though with average pay growth barely hitting two per cent pay packets will continue to shrink for the rest of the year at least.

'Households experience very different inflation pressures and so far this year rising prices have borne down most heavily on the poorest.

'For many of these families this higher inflation means an even tighter pay squeeze and an even bigger fall in the value of benefit such as tax credits.

'While there is little that government can do to bring inflation down, it can change how rising prices affect 12 million families whose incomes are being squeezed by the ongoing cash freeze to working age benefits.' 

Bank governor Mark Carney said at the end of June that 'some removal of monetary stimulus is likely to become necessary', but would depend on whether an increase in business spending could counter the slowdown in consumer spending

Sterling sank on the news as lower inflation means the Bank of England is less likely to raise interest rates from record lows of 0.25%.

The pound, which had touched 1.31 US dollars earlier in the day, slipped back to 1.30 US dollars.

The UK currency fell by 0.5 per cent against the euro to 1.13 euros.

The Bank's deputy governor, Ben Broadbent, said last week that he is 'not ready' to hike the cost of borrowing due to too many 'imponderables' in the economy.

Three out of the eight Monetary Policy Committee (MPC) members - Ian McCafferty, Kristin Forbes and Michael Saunders - unexpectedly backed a move to increase rates to 0.5 per cent during the last vote due to concerns over rising inflation.

Bank governor Mark Carney said at the end of June that 'some removal of monetary stimulus is likely to become necessary', but would depend on whether an increase in business spending could counter the slowdown in consumer spending.

 

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