-Inflation slows down, how sustainable is it?
U.K. inflation unexpectedly slowed down to 2.6 percent in June. Could this be a good sign following months of mounting concerns about inflationary pressures over consumer spending and economic growth? It could well be too early to tell, as there is no indication yet that the slowdown is sustainable in the long term. U.K. inflation was down from 2.9 percent in May to 2.6 percent in June, according to the Office for National Statistics. This was mainly because of lower petrol and diesel prices that fell for the fourth month in a row in June. According to some economists, the slowdown in inflation could lessen pressure on the Bank of England in applying an increase in the interest rate.
"The first half of 2017 has been tough for the U.K. consumer, with a steep pickup in inflation meaning that wages have been falling in real terms, forcing consumers to retrench. But inflation data brought some better news," according to research by Andrew Goodwin, the leading U.K. economist at Oxford Economics.
He wrote, "This was only the second time in the past 14 months that inflation had fallen from month-to-month and though a certain degree of volatility is not uncommon, unusually there was no obvious one-off factor to explain the downside surprise, merely general softness across the core categories.”
On the other hand, the U.K. government was forced to borrow more than expected in June after a jump in the U.K.’s budget deficit to £6.9 billion, which is almost 50 percent higher than the same month last year.
"These numbers are a real surprise, showing the first drop in inflation since autumn 2016. This is going to kill the chances of a rate rise in the short term. We'll learn more about the Bank of England's thinking in a couple of weeks, but we can expect the calls for a rate rise to reduce to a whimper," said Lucy O'Carroll, chief economist at Aberdeen Asset Management.
According to Ipek Ozkardeskaya, a senior economist at London Capital Group, “the slowdown in inflation suggests that the decline in British real wages may have started to translate into a slower consumer inflation, as anticipated by the Bank of England (BoE) Governor Mark Carney.”
“The easing in the U.K.’s inflationary pressures resuscitated the BoE-doves, given that the softer inflation will take a decent pressure of the BoE’s shoulders and allow the bank to keep the interest rates at all-time low levels to support the British economy through the uncertain Brexit times,” she said in a research note.
It will be important to see inflation data in the coming months to be able to see the direction of the division at the Monetary Policy Committee of the Bank of England.
