UK inflation slows down to 2% in temporary blip

·2-min read
A shopper walks past Selfridges whose Summer Sale is advertised in their window banners on Oxford Street in the West End on Covid 'Freedom Day'. This date is what Prime Minister Boris Johnson's UK government has set as the end of strict Covid pandemic social distancing conditions with the end of mandatory face coverings in shops and public transport, on 19th July 2021, in London, England. (Photo by Richard Baker / In Pictures via Getty Images)
Retail discounts triggered an unexpected fall in UK inflation. Photo: Richard Baker/In Pictures via Getty

Inflation in the UK slowed down to 2% in July, from 2.5% in June, according to the latest Office for National Statistics (ONS) data — a reading that seems to point to a temporary decline as expectations mount that it will head up to 4% by the end of the year. 

The consumer price index was held back by an artificial bump in prices a year ago when the ONS stopped using estimates and started measuring prices. When this drops out of the figures, inflation will rise.

The Bank of England's target rate is 2%. 

The ONS said that the the largest upward contribution to the 12-month inflation rate came from transport, as lockdowns eased and Brits got on the move again. 

Within transport, the movements were caused mainly by changes in the price of motor fuels. Motor fuels made a downward contribution to the 12-month rate between March 2020 and February 2021, before the contribution turned positive in March 2021 and subsequently increased to 0.41 percentage points in June 2021. It has eased in July to 0.36 percentage points. 

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Meanwhile, clothing and footwear, and a variety of recreational goods and services made the largest downward contributions to the change. 

For most months since March 2020, the contribution from clothing and footwear has been negative. It turned positive from May 2021 in part because of the low prices experienced during the first coronavirus lockdown in 2020.

Price rises for second-hand cars, compared with falls a year ago, resulted in the largest, partially offsetting, upward contribution to change.

Earlier this month, UK consumer price inflation was forecast to hit 3.9% in 2022.

The National Institute of Economic and Social Research (NIESR) said that inflation would soar to almost double the BoE's target rate in early 2022, before falling back to 2% in 2023 following a bank interest rate hike. This would be the highest rate of inflation since late 2011.

Even at 2%, inflation is running ahead of savings rates. You can currently make a maximum of 1.7% in a standard savings account, and that involves tying your money up for five years.

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