UK inflation retreats to zero in June

The Consumer Price Index dropped to zero in June, reversing May’s 0.1 per cent rise and drifting back towards April’s 0.1 per cent decline – the first negative reading since 1960, reports The Times.

The reading is good news for families as prices stay flat at a time when wage levels are expected to continue rising. They are expected to be up by 3.3 per cent when official figures are released next week.

Shops starting their summer sales and a fall in food prices erased the inflationary gain made in May, while smaller rises in air fares compared to a year ago also had an effect on prices, according to the Office of National Statistics.

The ONS said the timing of the summer fashion sales had an effect on June’s inflation rate compared with last year when the timing of the sales was pushed back, helping to raise prices by 0.6 per cent.
“Prices usually fall between May and June as the summer sales begin but last year the average prices of a number of products rose,” the ONS said.

The prices of food and non-alcoholic drinks fell by 2.2 per cent between June 2014 and June 2015. It dropped by 0.2 per cent between May and June, marking the 12th consecutive month of a food price falls and the longest stretch of decreases since 2000.

However the decline in inflation from May’s reading was expected by economists and is in line with forecasts produced by the Bank of England in its latest inflation report. Since February, the CPI has averaged zero per cent.

Philip Gooding, from the ONS, said: “Inflation has continued its pattern of recent months, when prices have been very little changed on the previous year.

“The headline rate for June has dropped very slightly on May, back to zero, thanks to small downwards effects from movements in clothing and food prices and air fares.”

The consumer price inflation is the speed at which the prices of goods and services bought by households rise or fall. A flat 12-month rate means that a basket of goods and services bought in June 2014 would still cost the same in June 2015.

Howard Archer, chief UK economist at Global Insight, said the latest figure was good news for consumers. “With earnings growth currently seeing clear improvement and employment high and rising, purchasing power is currently in rude heath,” he explained.

Mr Archer added that it is likely inflation will stay around the zero mark throughout the summer before “heading gradually but decisively up from September”.

Mark Carney, the governor of the Bank of England, said prices are likely to rise later this year as 2014’s dive in oil prices evens out, with inflation expected to return to around its 2 per cent by early 2017.

However, the “core inflation” reading, which strips out increases in more volatile items such as energy, food and alcohol, fell to 0.8 per cent in June, its joint lowest level since March 2001, suggesting the fall in oil prices is having a continued effect on the cost of other goods and services.

Chris Williamson, chief economist at Markit, said the figures “raise questions over whether the underlying price pressures are really picking up to the extent that the Bank of England is anticipating”.