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%.

CPI chart

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.”

Contributor

Angela Monaghan

The GuardianTramp

Related Content

Article image
UK cost-of-living crisis grows as dearer imports push inflation to 2.9%
More expensive petrol, clothing and food fuel rise in CPI as unions call for pay rises and end to public sector pay cap

Phillip Inman

12, Sep, 2017 @1:49 PM

Article image
Inflation dips to 2.7% as impact of Brexit vote starts to fade
Cost of living squeeze eases after a small fall in both petrol and food prices, says ONS

Richard Partington

20, Mar, 2018 @10:34 AM

Article image
Rising food and fuel prices hoist UK inflation rate to 2.3%
Standard of living fears build as wage growth slows and inflation leaps from 1.8% in January to highest level since September 2013

Katie Allen

21, Mar, 2017 @11:27 AM

Article image
Fuel price plunge pulls UK inflation back to 0%
Tumbling cost of crude oil, supermarket price war and cheaper clothing offers timely boost to consumer spending

Katie Allen

15, Sep, 2015 @6:57 PM

Article image
The Brexit economy: looming rate rise clouds outlook as inflation dips
‘The beast from the east’ blew the UK economy off course, further complicating an already complex picture

Richard Partington

26, Apr, 2018 @12:21 PM

Article image
How has Brexit vote affected the UK economy? July verdict
Each month we look at key indicators to see what effect the Brexit process has had on growth, prosperity and trade

Richard Partington

31, Jul, 2019 @5:00 AM

Article image
Warnings over rising food prices as UK inflation hits near two-year high of 1%
Rising petrol and clothing prices drive increase in cost of living, with falling pound starting to make imports more expensive

Phillip Inman, Sarah Butler and Larry Elliott

18, Oct, 2016 @11:43 AM

Article image
Inflation is only going one way. Let's hope interest rates don't follow | Larry Elliott
The question is not whether inflation will continue rising in 2017 but how high it will go. At least 3%, maybe even higher …

Larry Elliott

11, Apr, 2017 @11:01 AM

Article image
British consumer keeps UK plc afloat as key sectors start to sink
As a no-deal Brexit looks increasingly likely sterling is starting a steep slide and growth is stalling

Richard Partington

31, Jul, 2019 @5:00 AM

Article image
UK inflation rises to 1.8% spurred by weak pound and rising fuel costs
Production costs jump 20% in a year as pound’s sharp fall following Brexit vote ramps up imports bill just as oil prices start to bite

Katie Allen

15, Feb, 2017 @12:07 AM