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Has inflation peaked? - HL comment

Ben Brettell, Senior Economist, Hargreaves Lansdown:

Last month’s unexpected fall to 2.6% raised hopes that UK inflation had peaked, as the Brexit-induced weakness in the pound started to fade.

Today economists had predicted a slight uptick to 2.7%, but in the event CPI inflation held steady at 2.6%, with falling fuel prices counterbalanced by higher prices for clothes, utilities and food.

It now looks quite possible inflation has peaked, and will fall back further incoming months. The year-on-year increase in producers’ raw material costs fell to 6.5% in July – undershooting forecasts for a 7.0% rise. This was down from 10% in June, the biggest month-to-month slowdown in almost five years. 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.

All this is good news for the consumer, as it helps alleviate the continuing squeeze on household finances, though pay is still shrinking in real terms for now. Tomorrow’s labour market update is expected to show wage growth remained at 1.8% for the three months to July.

It’s also good news for borrowers - 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. With only two of the eight members voting for higher rates earlier this month, it seems even a return to 0.5% is some way off for now.