1) The peak in inflation is probably behind us
The inflation rate has slipped back to 2.6% in the year to the end of June, down from a four-year high of 2.9% in the year to the end of May.
2) The upward pull from the energy component of inflation continues to recede
The past 12 months have seen significant movements in global oil prices. After they’ve reached their low in February 2016, oil prices drifted upward in the second half of last year, climbing to 55$-per-barrel after the OPEC’s decision last December to cut production volumes. The recovery in oil prices came to a halt later this year. Brent crude plunged back to below 45$ a barrel in June amid oversupply jitters.
As a result, the contribution from the energy component to the overall inflation rate fell from the peaks that were seen earlier this year.
3) The pass-through of the sterling depreciation is moderating
The dive in the sterling exchange rate in the aftermath of the UK’s vote to leave the EU has caused producers’ input costs to surge to multi-year highs. The peak was reached in January when the 12-month growth rate in input prices soared to 20% – a five year high.
While the pass-through of the sterling depreciation into higher consumer prices is still under way, there are reasons to believe it has now passed its peak. Our latest Manufacturing Outlook suggest that manufacturers’ margins on domestic sales are on a recovery mode while inflationary pressures through the supply chain are moderating.
4) What does this mean for consumers’ pockets?
Consumers were hit hard by the surge in inflation in the first half of the year, as wage growth remained sluggish. So the drop in the inflation rate means that the contraction in households’ real incomes is likely to moderate.
5) What does this mean for the Bank of England?
Monetary policymakers sent mixed messages last month. The tone has shifted towards lower tolerance for above-target inflation while labour market conditions remained remarkably strong.
The latest data confirm that inflationary pressures witnessed in the previous months are mainly a consequence of the sterling dive in the aftermath of the Brexit vote. Domestic inflationary pressures – if any – are likely to stem from the rise in input costs across the UK supply chain. Wages, however, remain subdued and there are little signs of upward pressures on earnings so far this year.
This is likely to delay the chances of a rate hike – for now.