Inflation falls slightly in July

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UK inflation edged down to 2.8 per cent in July, according to new official data published by the Office for National Statistics (ONS) this week.

UK inflation edged down to 2.8 per cent in July, according to new official data published by the Office for National Statistics (ONS) this week.undefined

The consumer prices index (CPI) measure of inflation fell from 2.9 per cent in June. The ONS said reductions in the cost of clothing and leisure activities were the biggest influences on the fall in the rate of inflation.

Inflation is a measure of the value of the pound in your pocket. The faster inflation goes up, the more it reduces the value of the money you hold.

The retail prices index (RPI) measure of inflation fell from 3.3 per cent to 3.1 per cent. This measure of inflation includes the cost of renting and servicing a mortgage.

RPI is used to calculate the rate of increase in rail fares. This month’s announcement means that train fares run by the government will rise by RPI + 1 per cent, so 4.1 per cent from January 2014.

The CPI inflation rate is still well above the Bank of England’s target of 2.0 per cent but has fallen sharply from the recent peak of 5.2 per cent in September 2011. The last time inflation was below 2.0 per cent was at the end of 2009.

However, at 2.8 per cent, inflation is still nearly three times the annual rate of earnings growth, which the ONS confirmed was 1.0 per cent in the three months to the end of May. This means the squeeze that households have been under for the last three years is continuing.

Last week the Bank of England announced that it is to adopt a policy of forward guidance on interest rates. However, there are three caveats that will “knock-out” the possibility of interest rates being linked to unemployment and going up only when the unemployment rate falls from 7.8 per cent to 7.0 per cent. It expects the rate to reach 7.0 per cent in 2016.

One of the triggers is that if the Bank of England expects inflation to be higher than 2.5 per cent in 18-24 months time then the commitment to keep interest rates low will be overridden.

The Bank of England’s latest Quarterly Inflation Report published last week predicted that inflation will rise slightly over the rest of 2013 to around 3.0 per cent before falling back during 2014 towards the 2.0 per cent target.

This means inflation should be below 2.5 per cent by the time the unemployment rate drops to the 7.0 per cent rate, so the caveat is unlikely to apply.

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