Inflation fall is a blip, not a trend
By Chris Gilchrist    14th August 2007

Despite July’s lower-than-expected inflation, the Bank of England is still likely to raise interest rates to 6% in the next couple of months.

Year-on-year UK inflation as measured by the Consumer Prices Index fell to 1.9% in July from 2.4% in June. But this doesn’t mean inflation is licked and borrowers should still expect another quarter-point rise to 6% in the Bank of England base rate in the autumn.

Among the one-off factors that led to the surprise drop in July inflation were a massive 10% drop in the prices of furniture and furnishings, lower food prices as Tesco and Asda slugged it out in 'we’re cheaper’ ad campaigns, and the continuing fall in domestic energy prices.

Meanwhile, the more representative Retail Prices Index was up 3.8% over the 12 months to July, a fall from the previous month’s 4.4%.

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Rates still look to head higher
UK inflation is still about a tenth higher than the European average, which is one factor the Bank of England’s Monetary Policy Committee will certainly take into account in their interest rate deliberations.

Another is the fact that unless oil prices take a tumble, the trend to lower domestic energy prices will end in the autumn, removing one inflation-cutting factor from the equation. And most experts are predicting higher food prices as a result of this year’s freak weather.

This suggests that the Bank of England will want to play safe and even if it keeps rates on hold in September, it’s still likely that there will be a quarter-point rise before Christmas.

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Article produced by EveryInvestor.co.uk