Squeeze on household budgets eases as inflation tumbles unexpectedly

Inflation in Britain rose less than expected in June, but remained above the Bank of England's 2% target for the fourth consecutive month, after breaking through the threshold for the first time in three years in March.

According to data released by the Office for National Statistics (ONS) on Tuesday (18 July), inflation as measured by the Consumer Price Index (CPI) rose 2.6% year-on-year last month, compared with a four-year high of 2.9% recorded last month, which analysts had expected to remain unchanged.

In May, the Bank of England said it expected inflation would peak at 2.8% this autumn.

On a monthly basis, inflation showed no growth last month, compared with a 0.3% increase recorded in the previous month and with forecast for a 0.2% uptick.

Lower prices for motor fuels and recreational and cultural goods and services were the main contributors to the fall in the rate, although that was partially offset by rising prices for furniture and furnishings.

"If inflation continues to moderate, this could bode well for economic growth – the UK economy is heavily reliant on the consumer, and economists had expected falling real incomes to eventually translate into lower retail sales," said Ben Brettell senior economist at Hargreaves Lansdown.

"If this fails to materialise the economy could see a stronger second half to the year."

Meanwhile, core CPI, which measures the change in prices for retail goods and services, including food and gas, hit 2.4%, down from the 2.6% rate recorded last month. Analysts had expected no change.

The latest inflation data comes only a week after the ONS warned the squeeze on households was being exacerbated by subdued wage growth. Earnings, excluding bonuses, rose by 2% year-on-year in May, but when the impact of inflation is factored in, real weekly wages fell by 0.5% compared with a year earlier.

"What hasn't helped in terms of the cost of living is large domestic increases in taxation, from insurance premiums as well as transport fares, which has exacerbated the effect of last August's rather hasty rate cut," said Michael Hewson, chief economist at CMC Markets.

"It could be argued [that] has fuelled the very boom in consumer credit that now has the Bank of England rather concerned about an overleveraged consumer.

"This was entirely predictable, as has been the rise in inflationary pressures which now appears to be prompting some debate on the Bank of England monetary policy committee, though it is unlikely that we'll see any move on policy at next month's August meeting."