Statistics released this morning confirmed that last month's increase in CPI to 1.9% was a blip rather than a trend, as the inflation rate fell back down to 1.6% in the year to July 2014. CPI inflation has now been below the Bank of England's target rate of 2.0% for seven months.
- Looking at what's happened over the month, the largest contribution to the fall in the inflation rate was clothing and footwear, where prices fell 5.7% between June and July, a larger-than-normal fall for this time of year, due to later timing of summer sales. Other downward contributions to inflation came from alcohol and tobacco; miscellaneous goods and services (particularly financial services); and food and non-alcoholic beverages.
- There was some upward pressure on inflation from transport prices, particularly the price of second-hand cars and sea transport.
As we reported last month, a range of factors should continue to keep inflation subdued, including the stronger pound; limited inflationary pressure from commodities; and spare capacity, which is likely to continue to bear down on margins and wages.
The strong pound has certainly had a bearing on input prices for manufacturers, as today's producer price figures highlight. The overall price of inputs bought by UK manufacturers for processing fell 7.3% in the year to July, linked to a falling prices for crude oil and imported materials. The only area where input prices increased was home-produced materials, with prices of some construction products rising, reflecting capacity constraints in that sector.
The falls in input prices have also fed through to output prices: the output price index for goods produced by UK manufacturers (factory gate prices) fell 0.1% in the year to July.