Surprise fall in UK inflation makes an interest rate rise unlikely

The release of the June UK inflation figures has shown a surprise drop in the annual rate of inflation.

Based on the consumer price index (CPI), annual inflation fell from 2.9% in May to 2.6% in June against consensus expectations of no change.

The core inflation rate, which excludes volatile food, tobacco and alcohol, also came down, falling from 2.6% to 2.4%.

Transport prices were a drag

Transport prices were the biggest drag on the annual rate as has been the case in recent months. However, the second largest drag came from inflation from recreation and culture services – where prices fell 0.2% over the month compared to a 0.7% rise a year earlier.

The ongoing squeeze on household budgets may have lowered demand for these non-essential services, causing prices to fall, but the hot weather may have also played a role.

Bank of England to keep rates on hold

Overall, the lower-than-expected inflation figures will ease pressure on the Bank of England to consider a rise in interest rates ahead of its August meeting.

The next Inflation Report should show a much weaker growth outlook than previously expected, with inflation only slightly above the Bank’s forecast.

We continue to expect the Bank of England to keep interest rates on hold until well into 2019.

The views and opinions contained herein are those of Schroders’ investment teams and/or Economics Group, and do not necessarily represent Schroder Investment Management North America Inc.’s house views. These views are subject to change. This information is intended to be for information purposes only and it is not intended as promotional material in any respect.