U.K. Inflation Posts a Temporary Slowdown on Its Way to 4%

U.K. inflation eased in July in what is widely seen as a blip on its way well above the Bank of England’s target this year. Consumer prices rose 2% from a year earlier compared with a 2.5% increase in June, the Office for National Statistics said Wednesday. It was the first weaker-than-expected reading for inflation in at least three months. The slowdown partly reflects a sharp rise in prices in July last year, when some of the restrictions deployed during the first coronavirus lockdown were eased. With the economy mostly reopen except for overseas travel, inflation is expected to accelerate quickly.

Manufacturers felt stronger-than-expected inflation both in the cost of raw materials and for goods leaving factory gates. Input prices rose 9.9% from a year ago in July. That’s more than the 9.7% pace of the previous month, which was revised higher. Output costs rose 4.9%, the highest since December 2011 and more than economists had forecast.

July’s retail price index, which is usually used to set rail fares starting in the following January, stood at 3.8%. That’s more than double the rate of a year earlier. The Bank of England predicts price growth of 3% in August and more than 4% in the final two months of the year. Economists surveyed by Bloomberg are less pessimistic, seeing a peak of 3.6% in the first quarter of next year.

The pickup is set to be driven by global increases in energy and goods prices, mirroring the U.S. where annual inflation is running at over 5%. Crucially, BOE policy makers say the surge is likely to be short lived, though they warn that the strength of economic recovery means some withdrawal of monetary stimulus will be needed to return inflation to target over the next two years.

U.K. Inflation Posts a Temporary Slowdown on Its Way to 4%, CNBC, Aug 18