UK Inflation unexpectedly falls in June 2017 to 2.6%
UK inflation has fallen to 2.6% in year-on-year figures released by the Office of National Statistics (ONS) in June 2017, down from 2.7% (as measured by CPIH) or 2.9% (as measured by CPI) in May 2017. This has been driven by cheaper petrol and diesel prices along with a fall in certain recreational and cultural goods and services (including computer games, television, audio equipment and toys), despite a partial offset by rising prices in furniture and furnishings.
While inflation has decreased slightly, for the first time since April 2016, it remains higher than the level of inflation seen since mid-2013 and continues to overshoot the targeted level of 2%. Furthermore, the real value of wages continues to be squeezed as inflation overshoots the current pay growth of 2%. The government has come under particularly pressure in recent times over the squeeze on households, and the Treasury have acknowledged many families are struggling financially as a result.
The government has introduced the national living wage and has cut taxes, raising the personal allowance, along with offering free childcare but this is argued to still not be enough while inflation overshoots pay growth. Financial institutions are also being forced into raising interest rates as we have seen since the start of the year, as savers look to move out of cash where it is held by choice, to maintain the real value of their capital.
There are competing theories as to why this fall has occurred. The first is that this is simply a temporary downward blip. The downward fall in motor fuels is mainly explained by a fall in crude oil prices of around 13% since the beginning of the year. However, the falling price of toys simply acts as a reversal to an upward movement seen in May. UK prices in some sectors (such as food) have not risen as fast as in other EU countries and so it is plausible to think that June’s data is simply a temporary outcome.
Another theory surrounds the value of the sterling. Sterling dropped immediately when the UK voted to leave the EU in June of last year. Everything else held constant, this meant that prices for goods and services imported would immediately increase. As a result, motor fuels and airfares, which are denominated in dollars, both became immediately more expensive but the extent to which this is borne by households depends in the short-term upon hedging measures in place across businesses to guard against adverse currency movements. But prices in other countries have been rising too and some have highlighted rising global commodity prices as an important factor. Despite this, June’s fall will have undoubtedly been helped by a fall in global oil prices. The Bank of England and major economists have outlined that they expect the effect of the depreciation of sterling to have an impact into 2018 and so June’s figures are not expected to reflect an ongoing decline in inflation.
Finally, there remains an increased level of uncertainty following Brexit which is slowing the UK economy by delaying investments. In data released, the UK economy grew by only 0.2% in the first quarter, the slowest across all countries in the G7. Second quarter data is not expected to be any better either. However, despite this, much research indicates a time lag between slowing economic growth and falling inflation so this theory may be a bit too soon to rely upon at present.
It is likely that June’s figures are a temporary blip driven by the fall in oil prices globally. Uncertainty remains high but it would now appear unlikely for August to see the Monetary Policy Committee increase interest rates. Governor of the Bank of England, Mark Carney, has outlined that while a rise in interest rates may be premature for now, some removal of stimulus may be necessary if inflation remains above-target and so we may see some change to quantitative easing as a starting step instead.
It is also worth noting that a few changes are making their way into the ONS’ reporting of inflation. This release from the ONS was the first without a pre-release meaning that ministers and other officials did not receive access to the information prior to publication. In addition, the reporting includes two measures of inflation, specifically Consumer Prices Index including owner occupiers’ housing costs (CPIH) and the Consumer Prices Index (CPI).
The CPI measure is estimated using a price indices comprised of a range of consumer goods and services bought by households. Movements in this price indices represent the changing cost of the basket held, and in turn, this reflects the level at which prices are increasing or decreasing in an economy. The CPIH measure takes this prices indices one step forward by including the costs associated with owning, maintaining and living in one’s home along with council tax payments too.
Despite CPIH being a more comprehensive measure, the Office for Statistics Regulation (OSR) raised concerns over its calculation in March 2016 and so it is not at present an official National Statistic. We will keep you updated for when the required changes are implemented by the ONS accordingly.
Should you wish to discuss any of this in more depth, and what is means for savers, do give us a call on 0191 4813777 and we’ll look forward to speaking with you.