CPI Inflation Grows to 0.6% in July


August 2016

CPI Inflation Grows to 0.6% in July

The Office for National Statistics has published its latest inflation report covering the period after the EU referendum showing CPI increasing to 0.6%.

Inflation as measured by the Consumer Price Index tracks changes in the cost of a common ‘market basket of goods’ (including food, fuel and clothing among other items) over time.

The 0.6% reading for July represents a 0.1% increase from June’s figure, bringing inflation to its highest rate since November 2014, though remaining “relatively low in the historic context”. The increase brings inflation a little close to the long term target of 2.0%.

The ONS explain that this time round, the main contributors to the increase were “rising prices for motor fuels, alcoholic beverages and accommodation services, and a smaller fall in food prices than a year ago”.

The rises were slightly offset by falling costs for toys and games as well as social housing rent.

The ONS also published a report on inflation measured by the Producer Price Index, tracking the “price of goods bought and sold by UK manufacturers” as well as manufacturing costs.

It measures factory gate (or output) prices - “the prices[s] of goods sold by UK manufacturers” (i.e. the “actual cost of manufacturing goods”)- and input prices - “the cost of goods bought by UK manufacturers for use in manufacturing”.

The ONS report that factory gate prices rose by 0.3% in the year to July, up from -0.2% in June. This, they said, is “the first annual increase since June 2014”.

Input prices rose dramatically, with the rate of inflation going up from -0.5% in June to +4.5% in July. The price of imported materials rose by 6.5%, due at least in part to devalued sterling.

Mike Prestwood at the ONS said that this is one area where the effects of the referendum are clear, but argued that its effects on CPI inflation were negligible if there at all.

He said: "There is no obvious impact on today's consumer prices figures following the EU referendum result, though the Producer Prices Index (PPI) suggests the fall in the exchange rate is beginning to push up import price faced by manufacturers.”

Howard Archer at IHS Global Insight said that the upshot of this increased cost faced by manufacturers is likely to be that workers pay growth may stagnate or even reverse.

“Companies may well look to clamp down on workers' pay as they strive to save costs in a more difficult environment and as imported input prices are lifted by the weakened pound” he said.

"Meanwhile, a likely softening labour market and reduced consumer confidence will dilute workers' ability and willingness to push for higher pay awards."