UK inflation fall to 1.6% lessens likelihood of interest rate rise

Bank Of England Building

The UK's annual inflation rate fell more sharply than expected in July, dimming the prospects of an interest rate rise in 2014.

The consumer prices index fell to 1.6% from 1.9% in June, marking the seventh month in a row that annual inflation has registered below the Bank of England's 2% target, according to Office for National Statistics data.

Economists had expected a smaller fall to 1.8%.

The larger-than-expected drop was driven mainly by greater summer price discounting among clothing retailers than is usual at this time of year. Clothing and footwear prices fell by 5.7% between June and July, compared with a smaller fall of 3.2% during the same period last year. Prices were slashed on a wide range of items, including trousers, coats and jumpers.

Alcohol prices, the cost of some financial services including bank overdraft charges, and food also contributed to the fall.

The news was not all good for consumers, who could face rail fare rises of up to 5.5% in 2015. The July inflation rate on the retail prices index (RPI) measure is used to calculate rail fare rises, and dropped to 2.5% last month from 2.6% in June. Increases are traditionally capped at RPI+1% – although train operators may raise fares on some routes by an extra 2%. That means some rail fares could increase by up to 5.5%.

Mark Carney, the Bank of England governor, has given mixed messages in recent weeks on the likely timing of a first increase in interest rates, which have left been on hold at 0.5% since March 2009. Economists said lack of inflationary pressure in the UK, coupled with weak wage growth, made a rate hike in 2014 less likely.

James Knightley, economist at ING, said: "On the face of it this supports an on-hold stance from the Bank of England. The combination of sterling strength (making imported goods cheaper), along with weak wage growth and lower energy prices, which are limiting business cost growth, means inflation looks set to remain contained for now.

"This further eases the pressure on the Bank of England to consider near-term interest rate rises and pushes the balance more in favour of a delay to rate hikes versus our current November official view for the first policy tightening move."

Powered by Guardian.co.ukThis article was written by Angela Monaghan, for theguardian.com on Tuesday 19th August 2014 10.20 Europe/London

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