Inflation slows more than expected to 2 per cent

The UK’s rate of inflation has dropped more than expected due to a fall in clothing prices during summer sales.

The price of consumer goods and services rose by an annual rate of 2 per cent in July, down from 2.5 per cent in June and less than the 2.3 per cent predicted by economists.

The Office for National Statistics (ONS) said the Consumer Prices Index (CPI) is now in line with the Bank of England’s target and was reduced because of a fall in clothing prices as summer sales took place.

The cost of recreational goods and services also fell, particularly the cost of routers, webcams and computer software, the ONS said.

The reading will ease concerns over the potential for soaring inflation with signs the recent high rates are easing.

However the drop could be temporary, with the Bank of England previously warning inflation could hit 3 per cent by the end of the year.

The ONS said petrol was the biggest contributing factor to inflation rising, with average petrol prices at 132.6 pence per litre in July 2021, compared with 111.4 pence per litre a year earlier.

The July price is the highest recorded since September 2013.

In comparison, the UK was coming out of the first national coronavirus lockdown at this point last year and petrol prices were starting to recover after a period of reduced demand.

Second-hand car sales also contributed to the inflation rise, being up 6.6 per cent on pre-pandemic levels, and have grown compared with a year ago when people were stuck at home due to the pandemic.

Customers have turned to used cars instead of new ones due to global shortages of the computer chips used in vehicles.

Despite inflation cooling, analysts still voiced concerns over future pressures, suggesting it could rise again later in the year.

Yael Selfin, chief economist at KPMG UK, said: “Fall in year-on-year inflation last month masks the strength of inflationary pressures currently within the UK economy.

“We expect inflation to accelerate further during the rest of this year, rising significantly above the Bank of England’s 2 per cent target, as supply chains remain under strain faced with a strong rebound in demand.”

Debapratim De, senior economist at Deloitte, said: “July’s inflation figures are lower than expected. But this does not signal an easing of underlying price pressures.

“If UK growth continues as forecast, without a major Covid-19 wave in the winter months, we are likely to see the first interest-rate rise by next summer.”

Bridget Phillipson MP, Labour’s shadow chief secretary to the Treasury, added: “People are already feeling the effects of inflation, whether it’s at the supermarket, petrol pump or paying for home improvements.

“The government must do all it can do to keep materials and other supplies moving to prevent the shortages that can lead to higher costs.

“Whether the inflation is temporary or otherwise, families should not have to pay the price for the government’s lack of a plan for HGV drivers and the costly red tape following their deal with the European Union.”

The largest downward contribution to the inflation change was recreation and culture, with recording media and games, as well as toys and hobbies, down.

Package holidays also fell slightly compared with a year ago.

The Retail Price Index (RPI), a separate measure of inflation, increased to 3.8 per cent. The number in July is typically used to calculate rises in regulated rail fares.

The CPI, including owner-occupiers’ housing costs (CPIH) – the ONS’s preferred measure of inflation – was 2.1 per cent for the month, compared with 2.4 per cent in June.

Additional reporting by Press Association