Cheaper fuel helps drive inflation rate down to 2.6%

Lower prices at the pumps saw inflation ease last month. Picture: Lynne Cameron/PA Wire
Lower prices at the pumps saw inflation ease last month. Picture: Lynne Cameron/PA Wire
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Inflation dropped back last month as the falling price of fuel and computer games eased the pressure on household spending power.

The Office for National Statistics (ONS) said the consumer prices index (CPI) measure of inflation eased to 2.6 per cent in June, down from 2.9 per cent the month before.

• READ MORE: Holiday costs push inflation towards four-year high

While the reading came in below economists’ expectations of 2.9 per cent, the rising cost of living remains above the Bank of England’s target of 2 per cent.

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Calum Bennie of Scottish Friendly said: “Despite a drop in the headline rate of inflation, many families will still be facing the same relentless pressure to make ends meet.

“The cost of food, household goods and furniture all became more expensive in June and with wage growth still flat those at the bottom will continue to turn to credit or rapidly deplete savings just to keep food on the table.

“As long as this squeeze continues the Bank of England faces a difficult balancing act. While on the one hand raising interest rates may help to combat inflation, on the other it will cause real pain for homeowners who could see the cost of their mortgages rise.”

Maike Currie, investment director for personal investing at Fidelity International, added: “Our pay packets aren’t keeping up with rising prices despite the UK’s unemployment rate reaching its lowest level since 1975.

“This is tightening the squeeze on UK households, which is bad news for an economy that relies on confident consumers spending on goods and services.”

Consumers have seen their pay squeezed by sluggish wage growth and higher inflation triggered by the Brexit-hit pound.

Annual total pay in real terms sank by 0.7 per cent to its lowest level since the summer of 2014 in the three months to May and fell by 0.5 per cent excluding bonuses over the period.

Jonanthan Athow, ONS deputy national statistician, said: “Today’s fall in inflation is mainly due to drops in petrol and diesel prices. However, the rate remains higher than in the recent past.”

The main downward pressure on the cost of living came from fuel, which saw the fourth consecutive month of falling prices, dropping 1.1 per cent between May and June.

Petrol prices dropped by 1.1p over the period to 115.3p per litre, while diesel declined by 1.4p to 117.3p.

Recreational and cultural goods, which include computer games, was also driving overall prices lower after dropping by 0.1 per cent on the month following a rise of 0.6 per cent over the same period last year.

Upward pressure on everyday prices came from food, which saw costs ease back by a smaller 0.3 per cent in June compared with a 0.4 per cent fall for the same month in 2016.

Last month’s drop was driven by a slide in the price of boxes of chocolates and bags of sweets, which caused the overall category for sugar, jam, honey, syrups, chocolate and confectionery to drop by 2.6 per cent.

Sterling sank on the news as lower inflation means the Bank of England is less likely to raise interest rates from record lows of 0.25 per cent.

• READ MORE: BoE chief economist may support interest rate hike

The pound, which had touched $1.31 earlier in the day, slipped back to $1.30. The UK currency fell by 0.5 per cent against the euro to €1.13.

The Bank’s deputy governor, Ben Broadbent, said last week that he is “not ready” to hike the cost of borrowing due to too many “imponderables” in the economy.

Three out of the eight monetary policy committee (MPC) members – Ian McCafferty, Kristin Forbes and Michael Saunders – unexpectedly backed a move to increase rates to 0.5 per cent during the last vote due to concerns over rising inflation.

Bank governor Mark Carney said at the end of June that “some removal of monetary stimulus is likely to become necessary”, but would depend on whether an increase in business spending could counter the slowdown in consumer spending.

The Bank expects inflation to peak at 3 per cent by the autumn of this year.

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