UK Inflation lower than forecast

The Office for National Statistics (ONS) reported that UK inflation has fallen to 0.3% since September 2015, driven largely by cheaper air fares and lower clothing prices (1).

This is contrary to the Bank of England estimate last week, which set an expectation for inflation to be maintained at 0.5% during the second half of the year (1).

British Inflation has been below the Bank of England’s 2% target for more than two years, mainly due to falling oil costs and strengthening of the pound. The central bank expects the drag from these factors to reduce, though the inflationary goal is not expected to be achieved until mid-2018 (2).

The ONS measure of core consumer price inflation fell from 1.5% to 1.2% – lower than the 1.4% forecast, according to economists. Meanwhile, the Retail Price Index, which is still used largely to index rents and pensions, also fell from 1.6% to 1.3% as reported (3).

Low inflation, modest economic growth, and uncertainty over the outcome of the EU referendum make it unlikely, in the eyes of many economists, that the Bank of England will raise interest rates from the historic low of 0.5% until mid-2017 (2).

  1. (1) – UK inflation rate falls on cheaper air fares – BBC News
  2. (2) – U.K. Inflation Unexpectedly Slows to 0.3%; Core Rate Drops – Bloomberg
  3. (3) – UK inflation slightly weaker than expected, steady at +0.3 percent – Reuters