New figures from the Office for National Statistics showed inflation fell to 1.6 per cent in July from 1.9 per cent in June.
The Consumer Price Index (CPI) measure of inflation figures will come as some relief to many workers, but average wages grew by just 0.6 per cent in the three months to June.
The latest CPI figures, which chart the rising cost of consumer goods, mean the Bank of England will now be under less pressure to step in and control inflation, which it could do by raising interest rates.
Victoria Clarke, economist at Investec, said: “We view today’s data as consistent with the mood music playing at present, which is that, for now, a late-2014 increase in the Bank rate appears to be off the cards.”
David Kern, chief economist at the British Chambers of Commerce, said the Bank could justify holding off putting up rates until mid-2015, but would probably choose early 2015.
He said: “Essentially, if inflation stays where it is today, the Bank can afford to wait. On the basis of what we know today, I think they can afford to wait until the middle of next year.
“If you ask me when they will raise rates, I think they won’t wait – I think they will raise rates in the first quarter. But at the moment, the data supports my view.”
Despite concerns of higher mortgage repayments for homeowners, some experts said any rises were likely to be moderate.
Laith Khalaf, senior analyst at Hargreaves Lansdown stockbrokers, said: “As long as inflation remains benign, the central bank will also have leeway to raise interest rates slowly and gradually, when they decide the time has come to do so.”
Prime Minister David Cameron suggested the lower than expected increase in goods prices was evidence that the coalition’s economic plan is working.
He said: “It’s good news that inflation is down to 1.6 per cent. We have to stick to our long-term economic plan to ensure financial security for families.”
Interest rates have been on hold at 0.5 per cent since 2009, meaning homeowners and borrowers have faced the lowest repayments on record. Before the banking crisis and the global economic recession which followed, they were 5 per cent in the UK. In the early 1990s, rates were as high as 15 per cent.
Liberal Democrat Chief Secretary to the Treasury, Danny Alexander, said: “The fact that inflation has been below the Bank of England target for seven consecutive months shows subdued inflation is now becoming the norm as the economy recovers. Eliminating the deficit fairly and repairing the UK economy remains central to the role of Liberal Democrats in government.
“These encouraging inflation numbers should give businesses the confidence they need to deliver the investment required to boost productivity. Rising productivity is the only route to sustainable increases in living standards.”
But Cathy Jamieson, Labour’s shadow Treasury minister, responding to yesterday’s inflation figures, said: “While this fall in the rate of inflation is welcome, the squeeze on working people continues.
“The latest figures show regular pay rising by just 0.6 per cent – less than half the rate of inflation announced today. Wages after inflation have now fallen by over £1,600 a year under this government. Labour’s economic plan will deal with the cost-of-living crisis, make Britain better off and earn our way to higher living standards for all, not just a few.”
The largest contribution to the fall in CPI came from clothing and footwear, where prices fell 5.7 per cent month-on-month, or 0.2 per cent year-on-year. Retailers usually roll out discounts but held firm in June amid strong demand, resulting in sharper than normal falls this time.
Food and non-alcoholic beverages fell 0.4 per cent year-on-year, after no change in June and a 0.6 per cent drop in May. May’s decline was the first since March 2006.
Samuel Tombs, of Capital Economics, said despite the latest fall, the effect of the strong pound – which keeps down import costs – had yet to feed through fully to the shops.
Yesterday’s figures came after last week’s Bank of England inflation report, which made clear that policy-makers would take particular account of weak wage growth when considering whether they should hike rates.
Warning on the cost of living, Campbell Robb, chief executive for housing charity Shelter, said: “This house price hike is yet another blow for people across the country desperate to put down roots.”
John McLaren: UK likely to stay high-inflation economy
The latest inflation figures are generally good news. Inflation has fallen to 1.6 per cent in July, from 1.9 per cent in June, and is well below the 2.8 per cent in July last year.
Does that mean the UK’s economic policies are working? That is a hard call to make as it remains difficult to understand much of the UK’s economic performance at present.
Employment continues to rise, inflation is falling but is still relatively high. Meanwhile, wages and productivity are largely at a standstill.
What it does mean is that there is less pressure on the Bank of England to raise interest rates, as inflation remains below its 2 per cent target ceiling.
Even though inflation is falling, the UK is likely to retain its position as a relatively high-inflation economy.
In June the UK had the highest inflation rate of any of the European Union’s 27 member countries, where the overall average was 0.7 per cent. This position, relative to other countries, has been true for most of the past five years. It is interesting to look at the sources for the UK’s relatively high inflation. In July the biggest areas of increase were in tobacco (8.1 per cent), electricity, gas and other fuels (4.7 per cent), transport services (4.9 per cent) and education (10.9 per cent). In each case the UK government plays a role in setting prices for these products and so the internationally high inflation rate is in part due to government policy rather than market forces.
Furthermore, the rise in the cost of education is caused by the second year of English university students paying higher tuition fees. As this rise does not apply in Scotland, this suggests the effective Scottish inflation rate would be lower, though there could be other inflationary effects at work which could enhance or help offset this difference.
As usual, the government’s standard measure of inflation, the 1.6 per cent rise in the Consumer Price Index (CPI) – which is used for uprating pensions, wages and benefits – is well below the 2.5 per cent rise in the Retail Price Inflation (RPI) rate, which is used for uprating train ticket prices in England and business rates on both sides of the Border.
Given that the RPI measure no longer has National Statistic status, due to long-known problems in the method of its calculation, it seems odd that the UK government still uses it for such purposes. The rise in the correctly calculated RPI measure (known as RPIJ), was 1.8 per cent in July – which if used instead of RPI would help reduce living costs for some consumers.
• John McLaren is honorary professor at Glasgow University’s Adam Smith Business School.