LONDON: Falling oil prices and a strong pound are likely to have anchored inflation at zero for a second successive month in July, giving further reason for Bank of England policymakers to delay raising interest rates.
City economists said official figures to be published on Tuesday are likely to show consumer price inflation (CPI) remained at zero last month. The rate, which is used by the government as its official measure to set pensions, wages and benefits, fell to 0% in February, and has remained close to that level ever since.
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It is now 18 months since CPI was at the Bank’s 2% target, and economists suggest it will not return to that level soon. The measure hit a low of -0.1% in April, and some analysts forecast that cuts in utility bills, and a fresh decline in petrol prices with retailers passing on recent falls in oil prices, could see it fall back below zero later in the year.
Looking ahead, inflation is likely to turn negative again for a couple of months,” said Samuel Tombs of consultancy Capital Economics. “Supermarket competition should drive petrol prices down before long. In addition, British Gas will cut its gas prices by 5% in late August and other utility companies are likely to follow suit.”
Chris Hare, analyst at investment bank Investec, agreed. He said: “Our call on the CPI is that inflation will remain at zero in July, although we judge that there is a material chance that it will ease back into negative territory.”
Alan Clarke, of Scotiabank, said inflation may have nudged up in July, but only to 0.1%, despite a fall in petrol prices of about 0.7% on the month.
However, Kristin Forbes from the Bank’s monetary policy committe said yesterday that keeping rates at a record low when the economy was growing at its pre-crisis trend and earnings were rising at a robust pace risked “creating distortions” and “undermining the recovery”.
Writing in the Telegraph, she said: “Maintaining interest rates at the current low levels during an expansion risks creating distortions. Therefore, interest rates will need to be increased well before inflation hits our 2% target. Waiting too long would risk undermining the recovery—especially if interest rates then need to be increased faster than the gradual path which we expect.”
Oil prices have halved since last summer and the prospect of sanctions being lifted against oil-producing Iran, adding to the glut in supply, has pushed the price of Brent crude to below US$50 (£32) a barrel.
