Falling prices for clothes in summer sales caused inflation to fall more quickly than expected in July, official figures show.
The consumer price index came in at 2 per cent, the Office for National Statistics said. This was down from 2.5 per cent in June and lower than the 2.3 per cent forecast by economists. Inflation is now in line with the Bank of England’s target but the headline rate is likely to climb sharply over the coming months.
Rail commuters in England and Wales could face a significant rise in prices as increases are usually linked to July’s retail prices index (RPI), which came in at 3.8 per cent, down from 3.9 per cent in June. Ticket prices rose by an average of around 2.6 per cent in March — RPI for July 2020 plus one percentage point. If this is repeated next year, fares would rise by an average of 4.8 per cent, the largest increase since 2012.
A spokesman for the Department for Transport said: “No decision has been made on national rail fares. The government is considering a variety of options and we will announce our decision in due course.”
The latest inflation figures are being affected by strong base effects. Inflation rose sharply in July last year as the country emerged from lockdown, so the annual comparison is weaker than it was in previous months. Core inflation rose by 0.4 per cent month on month in July 2020, the biggest rise since records began.
Samuel Tombs, economist at Pantheon Macroeconomics, said: “The near-term upward momentum in prices has faded, temporarily; the core CPI was unchanged on the previous month in July 2021, only slightly exceeding the 0.1 per cent average July decline seen in the 2010s.
“July’s decline in CPI inflation is attributable to the sharp increase in prices a year ago, when the economy emerged from lockdown and the ONS stopped imputing prices for goods and services that were previously unavailable.”
Prices are likely to rise sharply again in the following months on the back of higher energy bills and the end of the VAT reduction for the hospitality and tourism sectors. The Bank of England expects inflation to peak at 4 per cent this year but expects the headline rate to fall back towards target over the coming year. Others believe it could climb even higher.
Ruth Gregory, senior economist at Capital Economics, said: “July’s drop in CPI inflation is likely to be followed by sharp rises in the next few months, taking inflation to a peak of about 4.5 per cent. But provided higher inflation does not feed through into higher inflation expectations or persistently faster pay growth, we do not think that the Bank of England will respond next year by tightening monetary policy.”
Some city economists believe the Bank will be forced to move faster to curtail inflation. JP Morgan is forecasting a 15 basis-point increase to 0.25 per cent in the second quarter of 2022, six months earlier than previously expected.
A 2 per cent fall in clothing prices weighed on the headline index as retailers reintroduced their summer sales.
Jonathan Athow, deputy national statistician for economic statistics at the ONS, said: “Inflation fell back in July across a broad range of goods and services, including clothing, which decreased with summer sales returning after the pandemic hit the sector last year.”
Inflation was driven by sharp price rises at the pump, which was triggered by a rebound in oil prices. Average petrol prices reached 132.6p last month compared with 111.4p in July 2020. Prices for secondhand cars jumped by 7 per cent between June and July as car manufacturers continued to be beset by supply chain problems. However, prices for computers fell back sharply as a worldwide shortage of semiconductors eased, allowing businesses to reset their prices.
