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UK inflation turns positive in rise to 0.1%

inflation pounds

Inflation has risen for the first time during the last five months.

The Office for National Statistics (ONS) reported a change in CPI, which increased year-on-year by 0.1% in July, following June’s 0.0% rate of inflation.  

Initial forecasts had suggested that inflation would stay at 0.0% after the continuously low rate over the last five months, which also saw it turn negative for the first time in 55 years in April.

However, June to July saw prices decrease by 0.3% while core inflation, which excludes certain items likely to cause volatile price movements, rose to 1.2% in July. This caused the pound to grow stronger against the dollar by half a cent.

The rise in annual CPI inflation was mainly attributed to a slower rate in falling clothing prices year-on-year. Between the two months this year, clothing and footwear prices fell by 3.4%, a significant change from last year’s 5.7% during the same period. The ONS reported further evaluated that it is common for average clothes prices to fall during this period in the summer.

Food and non-alcoholic beverages pulled down the rise in inflation, with average prices between June and July falling by 0.7% in comparison to 2014’s equivalent of 0.2%:

‘The downward contribution came from price movements in most sectors – notably in the milk, cheese and eggs sector – where the prices of 2 pint cartons of shop bought milk have fallen. There was a partially offsetting contribution from rising prices in the bread and cereals sector.’

Smaller upward contributions to the change in the CPI 12-month rate were from transport services (2% increase year-on-year between June and July), recreation and culture (0.4% increase year-on-year) and miscellaneous goods and services (minimal change between the months this year, but had fallen by 0.5% between the same months last year).

Lord O’Neill, Secretary to the Treasury, responded to the report on low inflation by commenting that it is ‘great news for working people and family budgets’ but that ‘the job is not done and we will continue to remain vigilant to all risks’:

BBC business editor Robert Peston remarked upon the 1.2% rise in core inflation, and believes that it reveals that ‘domestic demand for goods and services, from consumers and businesses, is reasonably robust’. He goes on further to say that the rise is positive as ‘it underpins our economic recovery’.

Jeremy Cook, chief economist at international payments company Worldfirst.com, says that the core inflation increase will likely mean a rise in interest rates in 2016:

‘Inflation is positive in the UK, and positive for the UK. A period of ultra-low inflation is an obvious benefit for the UK economy – i.e. almost non-existent price rises in goods and services that consumers must buy, such as food and energy – frees up more disposable income elsewhere.

‘It will also allow people to pay down debt and replenish savings that may have needed to be used during leaner times. This has been the driver of the UK recovery.

‘The key for policymakers is as long as core inflation – prices without these essentials – remain strong, then the Bank of England will continue to look through these headline declines as temporary and not as a reason to adjust their position towards rate hikes. The rise to 1.2% - the highest in 5 months – will flesh out the argument that domestic inflation is building and that the headline figure is only this low due to external factors – commodities and the pound. This is crucial for interest rate hikes and we maintain our calls for a February interest rate increase.’

 

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