Stalling UK inflation eases pressure on Bank of England

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UK inflation figures out today of 2.6 per cent for July eases pressure on the Bank of England, but squeezed consumers can expect to see price rises beyond 2017.

Clothes, utilities and food prices rose, but were counterbalanced by falling fuel prices to deliver the same figure as the previous month.

Producers’ raw material costs fell 6.5 per cent in July down from a 10 per cent rise in June – the largest month-to-month slowdown in almost five years.

Hargreaves Lansdown senior economist Ben Brettell says: “Input prices are a leading indicator for consumer price inflation as higher input prices are often ultimately passed on to the consumer, and therefore a lower number here could bode well for softer consumer prices down the line.”

Signs that UK inflation is peaking is positive for borrowers, Brettell says.

“Moderating inflation means less pressure on the Bank of England to consider raising interest rates, and will allow the MPC to remove the sticking plaster of ultra-low interest rates very slowly indeed.”

While the figures appear positive for squeezed households, Smith & Williamson’s Global Inflation Linked Bond fund manager Thomas Wells says the impact of inflation on consumers is likely to be lagged.

Wells points to rail fares, which will be reset in January based on today’s retail price index, which was 3.6 per cent.

“Even if the government intervenes for political reasons and limits the increase to, say, 3 per cent, a £5,000 season ticket will still cost an extra £150 a year in January.”

Utility tariffs and other bills are also linked to inflation, Wells adds.

Share Centre chief executive Richard Stone says investors should watch the impact of inflation and negative real wage growth on consumer spending, particularly for retail companies and their results.

“There is some evidence that consumer expenditure is moderating and that has led, in part at least, to the slowdown in headline growth for the UK economy in the first half of 2017.”

Stone notes the savings ratio is already at a low of 1.7 per cent compared to the average rate over a period extending back more than 50 years of upwards of 9 per cent.