A second member of the Bank of England’s Monetary Policy Committee, David Miles, has hinted that the central bank could be heading towards increasing interest rates. Therefore, interest rates will need to be increased well before inflation hits our 2% target.
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The July Producer Price Inflation data release will be published simultaneously with the July Consumer Price Inflation data on Tuesday and these figures will highlight the absence of pipeline inflation pressures.
A smaller fall in clothing prices on the month compared with a year ago was the main driver behind the rise in inflation. Core inflation, which strips out volatile food and fuel prices, reached 1.2% in July, up from 0.8% in June.
“Today’s news on core inflation doesn’t offer much comfort to the doves (in the BoE’s rate-setting committee)”, said Sam Hill, senior UK economist at RBC Capital Markets, adding that the policy debate would be lively now that the rate-setter vote was split. While rent inflation rose to its highest pace in over six years in June to 6.5 per cent y/y, upward price pressures in the last three months have diminished significantly.
The UK is expected to be one of the fastest-growing advanced economies in 2015 after expanding 3 per cent in 2014, and BOE officials have signaled that, despite the weakness in prices, they expect to begin gently raising interest rates in the first half of next year.
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.
That helped lift the pound in morning trading and it hit a high for the day of $1.5672 shortly after the figures.
He added: “It’s taken a long time to get there, and we’re not fully there yet”.
While the headline figure was above expectations, it is still well below the 2% Bank of England target.
Richard Campbell, ONS head of CPI, said: “This is the sixth month running that headline inflation has been at or very close to zero”.
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In its latest economic outlook, the BoE stressed that a recent strengthening in the pound and a renewed fall in oil prices would push down inflation until at least the middle of next year and said the impact of the rise in sterling could persist even longer.
