Pound tumbles as UK inflation misses analyst targets

Expectations for an interest rate rise in August have faltered after June's UK inflation rate fell short of analyst expectations.

According to the Office for National Statistics, the consumer prices index rose 2.4% year-on-year in June. That was below a consensus estimate of 2.6% and unchanged from May.

Core inflation, which strips out fuel and food, was 1.9% against 2.1% last month. That was also below expectations; some analysts had predicted it would remain unchanged while others had even pencilled in a slight increase.

The downside surprise to core inflation entirely reflected a slump in core goods inflation to 1.3%, from 1.7% in May. Clothing retailers, in particular, cut prices more than usual for this year's summer sales, while food price inflation dropped to 2.0%, from 2.3% in May.

Tom Stevenson, investment director for personal investing at Fidelity International, said the figures were a “huge surprise”.

He added that CPI had been expected to bounce back up on the back of higher fuel and energy prices, but this was offset by failing prices for clothes and games. “Inflation remained at 2.4% for the third month in a row. Faster rising prices would have given the Bank of England cover for an interest rate hike in next month. Now it looks odds-on that the Monetary Policy Committee will hold fire again,” he said.

The pound fell on the news to its lowest since October, off 0.7% at 1.3021 against the dollar and down 0.28% against the euro at 1.1216. The pound had initially been trading ahead of the euro.

Stevenson added: “The Bank of England will be mindful of the deepening economic and political uncertainty as well as the potential for inflation to soften again as petrol price hikes drop out of the comparisons. August’s expected rate hike is therefore even less of a dead cert that it was before today’s surprise inflation print. It is not entirely possible that the bank will delay until November or even next year.”

Ben Brettell, senior economist at Hargreaves Lansdown, said that markets had been pricing in around an 80% chance that the Bank of England would increase the cost of borrowing next month.

“There’s certainly a case for higher rates as soon as next month, but I think the decision is more finely balanced that markets would have you believe,” he added.

Samuel Tombs, chief UK economist at Pantheon Macroeconomics, said inflation would “likely hold steady” in July, as three more of the big energy suppliers had increased prices.

But he expects CPI to fall after that, hitting its 2% target by the end of the year. “Both food and core goods inflation still have further to fall, given that import prices have stabilised over the last year.”

"Accordingly, June’s inflation data leave the MPC’s meeting in August very finely balanced. We think the Committee still will press ahead and raise rates next month, given the rebound in the activity data. But the probability likely is lower than the 75% chance currently price-in by investors, and markets should be alert for another unscheduled intervention by the Governor."