In what must be the only good news on the horizon for the government, inflation once again fell in June.
The government’s preferred measure of inflation, the Consumer Prices Index (CPI), stands at 122.3 (based on 100 = 2005), which equates to an annual inflation figure of 2.4%. This is a fall of 0.4% from May’s 2.8%.
The Retail Prices Index figure is now 241.8 (based on 100 = January 2987), which equates to an annual inflation rate of 2.8% down from May’s 3.1%.
Clothing & footwear, transport and food & non-alcoholic beverages were the main players forcing CPI down. This was partly offset by rising costs in recreation & culture (audio visual).
The Chancellor will be pleased at this crumb of comfort that proves the coalition government’s economic policies are on track.
Much of this drop in inflation is down to retail discounts says Andrew Goodwin, senior economic advisor to the Ernst & Young ITEM Club:
“More good news for consumers with another chunky decline in the inflation rate. The sharp decline in oil prices and its feed through to prices at the pump are clearly having a major impact, but that’s not the whole story. Weak demand, no doubt partly due to the bad weather, has forced retailers to discount earlier and more heavily than normal, particularly in the clothing sector.
“Inflation rates are unlikely to continue to fall at such a rapid rate over the next couple of months. Both oil and petrol prices appear to have stabilised in recent weeks, while the earlier summer sales will mean that the dip in prices we usually see in the latter part of the summer has probably already happened. Nevertheless, we should still see the CPI rate dip below the 2% target by the early autumn, particularly once last year’s big utility price hikes drop out of the year-on-year calculation.
“The combination of high inflation and weak earnings growth has made life very tough for households over the past five years – a basic comparison of the two series suggests a decline in real wages of around 7.5% which has taken spending power back to 2001 levels. But today’s figures suggest that we are now turning the corner. Wages should be able to keep pace with prices over the second half of this year and pull ahead next year, providing a significant boost to household finances and helping to kick-start the consumer recovery.
“These figures will be music to the ears of the MPC, as they look to guide the economy through choppy waters. In addition laying the ground for consumer spending to begin to recover, it also provides the Committee with plenty of leeway to provide further stimulus, should they feel it is necessary.”
Whereas Nawaz Ali, UK Market Analyst for Western Union Business Solutions puts it down to weak consumer demand:
“UK consumers were given a huge lift today after the ONS revealed a sharp fall in inflation in June. The unexpected drop in consumer price levels may help carry the spending boost seen during the Queen’s Diamond Jubilee weekend through the rest of summer.
“The annual rate of British inflation fell 0.4% to 2.4% last month, the lowest since November 2009, helped by early discounting on the high street and cheaper fuel.
“However, underneath this optimism, persistent concerns remain. Weak demand, both domestically and globally, is clearly evident as the real force behind the drop in consumer price inflation, which has subsequently weakened the pound in currency markets. It seems the lure of sale items is the only way retailers can attract any material demand from customers.
“For investors, the data increases the chances of further quantitative easing, with the UK economy not expected to return to growth now until the end of the year.”
But as ever, these inflation figures only apply to the average person buying the average set of goods and services. Each one of us does in reality have our own inflation, which depends on our age, where we live, what we eat, what we drink, our hobbies, number of dependants etc etc.