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Inflation stuck in July but falls seen ahead 24 August 2009
Steve Jackson (about the author)

Inflation unexpectedly held steady in July, but economists still expect big falls in the annual rate this year and monetary policy to stay loose for some time to come.

The Office for National Statistics said consumer prices were unchanged on the month in July, keeping the annual rate at 1.8 percent. Analysts had predicted a further easing below the Bank of England's 2 percent target to 1.5 percent. Sterling shot up around half a cent against the dollar and government bond prices fell after the strong reading caught investors by surprise, but most analysts said the figures did little to alter the outlook for monetary policy.

"We suspect that inflation can fall to one percent over the next few months which suggests that the Bank of England could offer additional stimulus if the recovery proves to be more sluggish than hoped," said James Knightley, an economist at ING.

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The Bank, which also expects CPI to drop below one percent this year, has slashed interest rates to a record low of 0.5 percent and unleashed a 175 billion pound quantitative easing program to get banks lending and the economy growing again.

Inflation has repeatedly surprised on the upside in recent months despite the worst recession for decades.

Chancellor Alistair Darling told the BBC the figures for July had yet to show "the full effect of the reduced gas and electricity prices coming through" -- a view supported by analysts. "CPI has proved a bit more sticky than we thought it would be. However, I do think the rate of inflation will fall quite sharply in August and September," said George Buckley, an economist at Deutsche Bank, citing a spike in energy prices last year that has not been repeated this year.

Much of the reason for the surprisingly strong CPI reading in July came from computer game and DVD prices, which rose this year but fell last year. And retailers cut furniture prices by less than last year probably because they had hiked prices by less in the run-up to the summer sales. Alcohol and telephone costs also had an upward effect while downward pressure came from meat, vegetables and take-away food prices.

While Tuesday's figures were not enough to materially change the policy outlook, any further signs of stickiness in inflation would dampen expectations of any further monetary policy easing.

"It does call into question further QE and even the latest policy decision," said Ross Walker, an economist at RBS. There is a troubling stickiness here. We are over a year into a pretty deep recession and we have core CPI rising and CPI stuck fractionally below its target."

The annual core inflation rate, which strips out energy, food, alcohol and tobacco costs, rose to 1.8 percent in July from 1.6 percent in June -- the highest since November 2008. However, incoming Bank policymaker Adam Posen, who joins the Monetary Policy Committee next month, told Bloomberg television it would be "premature" to tighten credit any time soon.

The broader measure of RPI inflation -- on which many wage deals are based -- picked up to -1.4 percent in July from -1.6 percent in June, against market forecasts for a sharper decline.

Source: Beat My Debt