CPI increases to 0.1% in July, in line with Experian’s forecast

The latest data released by the Office for National Statistics (ONS) shows that the Consumer Price Index (CPI) edged up to 0.1% in the year to July, in line with our forecast.

The main contributor to the rise in inflation came from the clothing category as price falls due to the summer sales were smaller between June and July this year than they were last year. In addition, there was a greater rise in air fares this year than last year, as well as an increase in recreation and culture prices; compared to a decline in 2014.

The latest numbers suggest that the downward inflationary pressures we’ve seen over the past year may be beginning to ease. Specifically, core inflation, which strips out food and fuel, edged up from 0.8% in June to 1.2% in July, and in the buoyant service sector, inflation increased from 2.2% to 2.4%. Tempering this however is the entrenched deflation in the food and fuel categories.

What does this mean for the future?

July’s release from the ONS reinforces our forecast that CPI inflation will remain below 1% for the remainder of the year. We also maintain our view that the first rise in Bank Rate will not take place until 2016q1. With inflation at such low levels and average earnings growing robustly (see our previous blog Latest UK Labour Market Statistics – August 2015 for more details) we expect real household disposable income to grow by 3.4% in 2015, with consumer spending to grow by 2.6%.