UK inflation rate falls to 2.4%

Hear that? That's the sound of the economy deflating. In June, UK inflation dropped sharply to its lowest since November 2009. The squeeze on incomes is slowly lifting.

by Rebecca Burn-Callander
Last Updated: 19 Aug 2013
The pointy heads at the Bank of England will be enjoying an ‘I told you so moment’. According to the Office for National Statistics, consumer price inflation fell to 2.4% in June from 2.8% in May. Quite the turnaround from the 5.2% peak seen last September. The decline takes the headline rate deliciously close to the Bank’s target rate of 2%.  And, to give credit where it’s due, the BoE did forecast this exact parabola.

But the question is: can it last?

The jury’s out on that one. The drop in inflation is down – in the main – to deep discounting on clothing and footwear as retailers try desperately to prop up sales throughout the dismal weather. Retail price inflation – the measure most widely used in wage negotiations too - fell from 3.1% in May to 2.8% last month, its lowest since December 2009. But discounting cannot continue indefinitely.

Reduced transport costs – basically, delayed hikes on fuel – and subdued food prices could also prove unreliable. As we speak, the US is in a state of drought – its most severe for 25 years. Soya bean prices have hit a record high, up 17% in the last month, while prices for corn and wheat have jumped 44% and 45% respectively. On our small island, we’re not faring much better. For those who have somehow managed to ignore the persistent and heavy rainfall, our crops are drowning. We can’t begin to notch up the knock-on effect on food prices yet, not until harvest time.

And then there’s the price of oil. Brent crude oil has risen to $104 per barrel, its highest since late May, up 17% from its mid-June low of $89. Between the rising costs of food and fuel, inflation could soon come straight back up.

Glass-half-empty theories aside, the current deflation trend will provide much-needed relief to cash-strapped consumers, and the economy. Long may it last.

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