UK inflation holds steady at 2.6% in July as fuel prices decline

Rail fares set to increase by 3.6% as inflation measured by RPI surges 3.6% in July.

Inflation in Britain rose less than expected in July, but remained above the Bank of England's 2% target for the fifth 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 (15 August), inflation as measured by the Consumer Price Index (CPI) rose 2.6% year-on-year last month, unchanged from the rate of growth recorded in June and below and analysts' expectations for a 2.7% reading.

Earlier this month, the Bank kept interest rates unchanged at a historic low of 0.25% and revealed it expects CPI inflation to peak at 3% in October this year. Inflation is then forecast to fall to 2.6% in 2018, before settling at 2.2% in both 2019 and 2020 respectively.

On a monthly basis, inflation declined 0.1%, compared with analysts' expectations for no growth.

The ONS added lower prices for motor fuels was the main contributor to the fall in the rate, although that was partially offset by rising prices for food, clothing and utilities.

"It appears that the inflation data is losing steam," said Naeem Aslam, chief market analyst at Think Markets UK.

"The inflation data overshooting the bank's target continues to be blamed on the sterling weakness. Going forward, the growth picture still looks subdued and this does not appear to be changing in 2018 as well."

While the latest annual figure is lower than the four-year high of 2.9% recorded in May, inflation as measured by the Retail Price Index (RPI) rose more than expected, climbing 3.6% year-on-year, compared with forecast for a 3.5% increase.

While CPI is the government's favourite measure of inflation, the increase in RPI is particularly significant as it regulates the increase in rail fares across Britain. Train operators in Britain are allowed to increase rail fares by as much as July's RPI figure, meaning regulated train fares will in all likelihood increase by 3.6% from January 2018.

The inflation data comes only a day before the release of the latest snapshot of Britain's labour market, which is expected to show average weekly earnings excluding bonuses only grew 2% year-on-year in June.

Economists have previously warned the squeeze on households was being exacerbated by subdued wage growth.