CPI drop to 2.6% provides some relief for cash-strapped consumers, but concern grows over living standards squeeze

Inflation fell unexpectedly in June for the first time in nine months as lower fuel prices provided some respite for cash-strapped consumers.

The consumer prices index fell to 2.6% from a four-year high of 2.9% in May according to the Office for National Statistics. Economists had expected the rate to be unchanged.

The fall was mainly driven by lower petrol and diesel prices, reflecting weaker global oil prices. Fuel prices fell by 1.1% between May and June, compared with a 2.2% rise over the same month a year earlier. Lower prices of games and toys also contributed to the fall.

However, at 2.6% inflation is still well above the Bank of England’s 2% target, and signalled a sustained fall in real wages as prices rise faster than current pay growth of 2%.

Frances O’Grady, the TUC general secretary, said the government must act to halt the decline in living standards.

“The government must stop this cost of living squeeze,” she said. “Many working people are caught in a vice as rising prices crush their pay. Ministers claim they are listening to struggling families. But now is the time to prove it. Britain needs a pay rise across the public and private sector.”

A spokesperson for the Treasury acknowledged that some households were struggling financially.

“While it is encouraging that inflation was lower this month, we appreciate that some families are concerned about the cost of living. That’s why we have introduced the national living wage, which is helping to boost earnings by £1,400 a year, and why we’ve cut taxes for millions of people to help them keep more of what they earn. We are also increasing our free childcare offer to help 400,000 working parents.”

Inflation has risen rapidly since the EU referendum in June last year, when the consumer prices index was just 0.5%. The surprise Brexit vote triggered a sharp fall in the value of the pound and drove up the cost of goods imported from abroad, making shop prices more expensive.



The pound fell half a cent against the dollar to $1.3020 after the inflation data was published on Tuesday, as investors believed it lessened the likelihood of a rise in UK interest rates in 2017. The last time the Bank of England raised rates was in July 2007, before the global financial crisis took hold, and rates are currently at an all-time low of 0.25%.

“Today’s data casts doubt over a rate hike later this year,” said James Smith, an economist at ING. “Even if inflation does recover, the decision to hike rates still hinges on the growth outlook.

“Bank of England governor Mark Carney recently suggested that the Bank needs to see stronger investment and a recovery in wage growth before tightening policy. But political uncertainty, the deteriorating outlook for consumer spending and rising cost bases from higher import prices mean that both look unlikely to materialise.”

Andrew Sentance, a former member of the Bank of England’s monetary policy committee and a senior economic adviser at the accountancy firm PwC, said inflation was likely to rise again in the coming months, reaching at least 3% in the second half of the year as the fall in the pound works its way through to shop prices.

“We have not necessarily passed the peak of inflation,” he said. “Consumers felt some respite from the inflation squeeze last month, but price rises are still likely to run ahead of wage increases for the rest of this year – continuing the current consumer squeeze and holding back economic growth.”

Sentance said the Bank should follow the US Federal Reserve by starting to gradually raise interest rates.

“If the Bank gradually raised interest rates that would help support the value of the pound so we would get less imported inflation and that might take some of the pressure off consumers,” he told BBC Radio 4’s Today programme before the inflation figures were published.

However, David Blanchflower, another former member of the MPC and a professor of economics at Dartmouth College, New Hampshire, said now is “precisely the wrong time” to raise UK rates.

“Why would you want to have a self-inflicted wound at a time when Brexit negotiations are taking place,” he said. “§We have no idea how it’s going to be resolved and that’s obviously a big problem. Waiting and watching is sensible. My suspicion is this inflation is temporary and it will start to drop away.”