Today’s inflation figures from the Office for National Statistics shows a fall in the headline rate to 2.6% – the first fall in the headline rate since April 2016.

The biggest contributor to that fall was fuel costs which fell 1.1% year on year – compared to a rise of 2.2% in the corresponding period last year.

Inflation remains above the Bank of England’s target rate of 2% – but below 3%, the trigger level at which the Governor has to write to the Chancellor to explain why it is so adrift from the target.

Immediately after the data release the FTSE 100 rose and the Pound fell – reflecting the fact that the figures were slightly below economists’ expectations and potentially reduce the likelihood of an interest rate rise in the near term.

Commenting on the data, Richard Stone, Chief Executive at The Share Centre said:

“The slight fall in the headline rate of inflation reflects a fall in fuel prices which individuals will have witnessed as they have been filling their cars up over recent weeks. In reality, the ONS notes in the detail of its report that inflationary pressures are still present. Some firms had exchange rate hedging in place which has delayed the passing on of the impact of higher import prices arising from Sterling’s devaluation. The report also notes more generally that the inflation rate for a range of goods has increased in recent months reflecting general rises in global commodity prices.

GBP Climbing (PD)

“Personal investors have been hit by the return of negative real wage growth (a rate of wage growth lower than the rate of inflation) which has squeezed disposable income and limited the ability to save and invest. As has been widely reported the savings ratio is at a record low. Some relief from that in the form of lower inflation is therefore welcome.

“The lower than expected inflation figure helps reduce the immediate pressure for an increase in interest rates, but 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.

“All eyes will be on the Governor of the Bank of England when he unveils the new £10 note later today to see if he gives any indication of the Bank’s potential appetite to increase rates. Observers will also be watching the contribution of new members of the Bank of England’s monetary committee over the coming months following the departure of two existing members to see if the change in composition of the committee changes its approach at all.

“We continue to believe that an interest rate rise before the end of the year is a distinct possibility.

“We also believe that the link between base rates and deposit rates may not be as direct as has been the case in the past – which may mean that savers do not see an immediate improvement in savings rates as banks remain awash with cash. Stock market valuations will likely tread water as rates start to tick up and higher borrowing costs impact corporate earnings.”

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