UK inflation remained steady in July following a drop in fuel prices, easing fears that the Bank of England could hike interest rates for the first time in 10 years.
According to the Office for National Statistics, consumer price inflation rose 2.6% last month, unchanged from June but below the 2.7% many analysts were forecasting.
The Bank of England expects UK inflation to rise further in the coming months, peaking around 3% in October before gradually dropping to 2.2% by 2020.
The lower than expected inflation rate suggests the Bank is unlikely to raise interest rates in the near term.
Howard Archer, chief economic adviser to the EY ITEM Club, said: “Inflation in July remaining below May’s peak level facilitates the Bank of England holding off from raising interest rates any time soon.
“We believe it is highly unlikely that the BoE will raise interest rates in 2017, with growth likely to remain lacklustre over the second half and with inflation looking close to peaking and likely to fall back appreciably in 2018.
“We have pencilled in one interest rate hike to 0.5% late on in 2018, but this is far from certain. It is partly based on the assumption that there will eventually be an agreement on a Brexit transition period that helps the economy improve later on in 2018. We certainly would not be surprised if interest rates remained at 0.25% going into 2019.”
However, the rate of Retail Price Index inflation, which is used to set rail fare increases at the start of each year went up from 3.5% to 3.6%.
James Tucker, head of consumer price inflation at the ONS, said: “We know there will be a focus on the RPI this month, but the National Statistician has been clear it is not a good measure and we do not recommend its use.”
The ONS said that the main downward pressure came from a drop in motor fuel prices, which was largely offset by rises in the price of clothing, utilities and food.
Core CPI inflation – which strips out energy and food prices – was also unchanged since June at 2.4%.
Despite lower than expected inflation, prices are still rising faster than wages, meaning households are beginning to feel the pinch as their disposable incomes start to fall.
Jack Coy, economist at Cebr, said: “While inflation has plateaued in recent months, current levels are nonetheless placing significant pressure on consumers.
“Price rises are exacerbated by stubbornly low wage growth. Average earnings including bonuses were just 1.8% higher in the three months to May than in the same period a year earlier. With little sign of a pickup in wage growth, the squeeze on real household incomes is likely to persist throughout 2017.”
Coy said that with inflation set to remain broadly around current levels over the rest of the year, the growing pressure on incomes could dampen the UK’s growth prospects.
“With other components of GDP, such as net trade, falling short of expectations in the first half of the year, the erosion of consumer spending is particularly problematic,” he added.
