Good news? Mixed response to surprise drop in inflation to 2.6%

The latest UK inflation figures will ease pressure on both the Bank of England and squeezed households; however, the surprise drop to 2.6 per cent could also indicate worryingly lower demand for non-essential services as consumer wages take a hit.

Last month inflation hit 2.9 per cent, the highest point since Brexit as sterling weakness drives up import prices.

The softer than expected reading released by the ONS today is underpinned by oil price weakness, but the second largest drag came from recreation and culture services – where prices fell 0.2 per cent over the month compared to a 0.7 per cent rise a year earlier.

The ongoing squeeze on household budgets may have lowered demand for these non-essential services, causing prices to fall, but the hot weather may have also played a role,” says Schroders senior European economist Azad Zangana.

Wage inflation is still negative in real terms.

WisdomTree research analyst Nick Leung says inflationary pressures undermining consumers’ debt-fuelled spending power is likely to encourage the Bank of England to delay the rate hike cycle “for as long as possible”.

This is compounded by weakening business sentiment and absent wage increases further eroding UK consumer spending, Leung says.

Zangana expects the Bank of England to keep interest rates on hold until “well into” 2019.

However, Share Centre chief executive Richard Stone says a rate rise before the end of the year is a “distinct possibility”.

“The underlying message in the ONS report and the fact that the fall was driven almost entirely by lower fuel costs, indicates inflationary pressures remain and the respite from rising inflation may be temporary.”

Hargreaves Lansdown senior economist Ben Brettell says the lower inflation figure will ease the impact on consumers, which the UK economy is heavily reliant on.

“Economists had expected falling real incomes to eventually translate into lower retail sales. If this fails to materialise the economy could see a stronger second half to the year.”