Inflation drops to 1.5% after fall in UK food and petrol prices

Bank of England unlikely to raise interest rates until next year after consumer price index dips further below 2% target.
A drop in food and petrol prices helped inflation edge lower last month, pushing it down to 1.5% from 1.6% in July, as measured by the consumer price index (CPI).

Figures from the Office for National Statistics showed the wider retail prices index (RPI) measure, used to set many pay deals, was down to 2.4% on the year, compared with 2.5% in July.

Both rates were as forecast by economists and they said the relatively benign price pressure in the economy, with CPI below the 2% target, would mean the Bank of England would be in no hurry to raise interest rates. Its monetary policy committee (MPC) has held borrowing costs at a record low of 0.5% for more than five years.

“Inflation is still on a downward trend despite the economic recovery’s strength,” said Samuel Tombs, senior UK economist at Capital Economics.

“Although the low inflation outlook is unlikely to prevent the MPC from raising interest rates entirely over the next couple of years, it should limit the speed at which they rise.”

The Office for National Statistics (ONS) said falling food and non-alcoholic drink prices were behind much of the slowdown in the main CPI measure of inflation. That echoed business reports indicating that a fierce supermarket price war had brought down food prices.

With oil prices around two-year lows, pump prices also helped bring down inflation in August. Petrol fell by 1.8p a litre between July and August this year, compared with a rise of 2p a litre last year, the ONS explained. Offsetting some of those downward pressures were the prices of clothing, transport services and alcohol.

The Treasury welcomed the latest inflation numbers. “The government’s long-term economic plan is working, with inflation falling by more than two-thirds since its peak in September 2011,” said a spokesman.

Inflation on either measure is still several times average wage growth, continuing the pattern of pay falling in real terms. Official labour market data on Wednesdayis expected to show average earnings for May to July up just 0.5% on the year. They fell 0.2% on the year for April to June.

Responding to the inflation data, the shadow Treasury minister, Catherine McKinnell, said: “While this fall in the rate of inflation is welcome, the squeeze on working people continues.”

Last week, the Bank of England’s governor, Mark Carney, predicted that interest rates would probably start to rise before real wage growth returned some time next summer.

But economists said the squeeze on households would play some role in the outlook for borrowing costs.

Howard Archer, economist at IHS Global Insight, said: “We suspect that low inflation, current very weak earnings growth, and the increased downside risks to economic activity coming from heightened geopolitical tensions and stuttering eurozone economic activity will cause the Bank of England to hold off from acting until February at the earliest, even though current ongoing robust economic activity and markedly falling unemployment provides support to the case for a near-term interest rate hike.”