There is little pressure for the MPC to adjust interest rates in either direction with CPI inflation remaining at the Bank of England’s 2% target for a second consecutive month in June. The continued absence of an upward trend in underlying inflation despite strong pay growth means the risks to our forecast are skewed to the downside.
Few signs of a rise in inflationary pressure
- There is little pressure for the MPC to adjust interest rates in either direction with CPI inflation remaining at the Bank of England’s 2% target for a second consecutive month in June. The continued absence of an upward trend in underlying inflation despite strong pay growth means the risks to our forecast are skewed to the downside.
- The 2.0% outturn was in line with both the consensus and Bank of England’s May Inflation Report forecast. A fall in fuel and utility price inflation took 0.2ppts off overall CPI inflation compared to May. But that was offset by a rise in food and clothing inflation.
- There was still little sign of rising underlying inflationary pressures despite the continued strength of pay growth in May. While core inflation ticked up from 1.7% in May to 1.8% in June that merely reversed the previous month’s fall. (See Table 1.) And our measure core services inflation fell for a second consecutive month, from 2.9% to 2.8%.
- What’s more, the drop in output price inflation from 1.9% to 1.6% suggests price pressures further up the supply chain are subdued. (See Chart 1.) Input price inflation also fell, from 1.4% to -0.3%, turning negative for the first time since June 2016.
- Looking ahead, a fall in energy price inflation (and our expectation that Ofgem’s energy price cap will be reduced in October) should take 0.4ppts off inflation over the second half of the year. That’s why the consensus is for CPI inflation to fall below the 2% target by year-end. We are forecasting that the fall in energy inflation will be offset by strong pay growth gradually pushing up services inflation. At the same time, declines in import and food price inflation that have weighed on CPI inflation for the past year should start to reverse.
- The upshot is that our forecast is for CPI inflation to bob around the 2% target for the remainder of this year before rising to 2.4% in 2020. However, the continued absence of an upward trend in underlying inflation means the risk to our forecast is to the downside.
Chart 1: Producer Output Price & CPI Inflation
Sources: Refinitiv, Capital Economics
Table 1: Consumer Prices
Core % y/y
Fuel % y/y
Food % y/y
Andrew Wishart, UK Economist, +44 20 7808 4062, email@example.com