UK inflation rate drops to 2.6%, but wage squeeze continues - as it happened

Graeme Wearden (until 1.15) and Nick Fletcher

from on 2017-07-18 17:08 (#2WR21)

The cost of living in Britain rose at a slower rate in June, but is still rising faster than wages

New 10 note launched
Lunchtime summary
UK inflation rate dropped from 2.9% to 2.6%...
But prices are still outstripping wages
The key charts: Why inflation dropped in June
It's the first drop in inflation since last October
Oil prices fell, but food got more expensive
Pound drops as interest rates are unlikely to rise soon

6.08pm BST

It was a tale of banks and currencies in the markets, with investors facing losses of varying sizes almost across the board.

Disappointing results from Goldman Sachs, as well as Bank of America, pushed the sector lower and undermined the rest of the market.

Indecision has once more reigned for the FTSE today...Much of the FTSE and sterling trade has been centred on this morning's CPI figures, which certainly gave the BoE some much needed breathing space after months of rising inflation and falling wage growth. Crucially, whilst much of the reduction in headline CPI has been attributed to falling energy prices, it is encouraging to see the core CPI figure also tumble, to 2.4%. Real incomes have been eroded in recent months, with the resulting cut in disposable income expected to hit consumer spending habits.

The key driver for European stocks appeared to be the currency, with a stronger euro weighing on appetite for equities. The euro/dollar advanced around 0.9% and eased clear of $1.15 to trade at its highest since May 2016 as the euro gained momentum from fresh dollar softness in the wake of the health bill failure.

The euro/dollar is now eyeing the May 3 high above $1.16 and, if breached, could start to target the $1.17 handle last seen in August 2015. A lot hinges on some pretty subtle language and shifts in tone by Mario Draghi and the ECB on Thursday. A removal of the easing bias in the policy statement could be enough to push it higher but we must prepare for Mr Draghi to don his dovish cap and talk down the currency lest a stronger euro gets in the way of the ECB's outlook.

5.21pm BST

After the launch of the 10 in Winchester, where he said nothing about the day's inflation figures, Bank of England governor Mark Carney has been speaking to Sky about that very subject.

He said the figures were consistent with the Bank's forecast that inflation would overshoot its target for some time, and the big picture remained the same: the fall in the pound pushing up prices.

3.48pm BST

The FTSE 100 has slipped back after the weaker than expected inflation figures, the Dow Jones Industrial Average is down on disappointing results and the latest setback for President Trump, but the real declines are in Europe due to the strength of the euro. Connor Campbell, financial analyst at Spreadex, says:

Over in the eurozone the Dax and Cac had a serious currency headache, dropping 1.4% and 1.1% respectively. That's because the euro's sterling-gains were joined by a similarly strong performance against the dollar, where it surged 0.9% to a fresh 2 and a half month high, now sitting just shy of $1.16.

3.21pm BST

Back with the US and some more disappointing economic figures, this time from the housing market.

The National Association of Home Builders housing index slipped from 66 in June to 64 this month, lower than the expected figure of 67. This is the lowest reading since last November. NAHB chairman Granger MacDonald said:

Our members are telling us they are growing increasingly concerned over rising material prices, particularly lumber. This is hurting housing affordability even as consumer interest in the new-home market remains strong.

NAHB: Builder Confidence decreased to 64 in July https://t.co/zvuBTtVh23 pic.twitter.com/aSSAUJVimM

3.09pm BST

Spain's economic recovery remains strong but the country still needs structural reforms to cope with any future economic shocks, says the International Monetary Fund, which has also upgraded its growth forecast. In its latest report it said:

Spain's economic recovery remains strong, with consumption, investment, and net exports all contributing to a more balanced growth pattern. A shift in resources toward Spain's competitive export sector, with the services sector creating most new jobs, has played an important part in the rebound. Banking sector balance sheets are stronger, private sector debt is coming down, and credit availability is improving. As the recovery is maturing, it is time to tackle the remaining vulnerabilities related to elevated public debt and complete the still-ongoing post-crisis banking sector adjustment. At the same time, reducing structural unemployment and fostering productivity growth remain priorities. Without farther determined progress on structural reforms and rebuilding of fiscal buffers, the economy would remain vulnerable to shocks and risk leaving some segments of the population behind.

Real GDP is projected to grow by 3.1 percent this year, and there is upside risk as the momentum created by past reforms may be bigger than estimated.

[Challenges} need to be fully addressed to offset the expected slow-down in medium-term growth and to build greater resilience. Public debt and structural unemployment are still high, population aging is creating fiscal pressures, and productivity lags that of EU peers. In addition, Spain's net debtor position with the rest of the world remains large, and financial sector adjustment and further reforms to strengthen and modernize the institutional arrangements are yet to be fully completed.

3.04pm BST

The latest setback for Donald Trump and his healthcare plans has prompted speculation the President will struggle to get other measures passed - notably tax reform - and unsettled investors.

So the Dow Jones Industrial Average has fallen 62 points or 0.29%, while the S&P 500 and Nasdaq Composite are down similar amounts. Healthcare companies were under pressure while uninspiring results from Bank of America and Goldman Sachs saw their shares slip back.

2.46pm BST

Here is our report on the launch, from Steven Morris.

2.43pm BST

So far no economic commentary from Bank of England governor Mark Carney, who has been praising Austen and putting the new tenner in the context of the history of banknotes.

2.33pm BST

The unveiling of the 10 note is underway and can be seen live here.

2.07pm BST

Later this afternoon, Bank of England governor Mark Carney is at Winchester Cathedral to launch the new polymer 10 note featuring Jane Austen. Given the day's inflation figures and the implications for interest rates, it will be interesting to see what, if any, comments he makes on the UK economy.

The launch of the plastic fiver last June came not long before the EU referendum, so Carney stuck to the subject of banknotes rather than wider economic issues.

1.25pm BST

The pound is still on the slide after the weaker than expected inflation figures suggested a Bank of England rate rise could be some way off. Against the dollar, sterling is now down 0.3% at $1.3016 and 0.9% lower against the euro at a1.1265. FXTM research analyst Lukman Otunuga reckons the pound could fall further:

The fact that sterling sharply depreciated across the board on Tuesday, after British inflation rates unexpectedly dropped to 2.6% in June, continues to highlight how the currency has become increasingly sensitive to monetary policy speculation. Price action suggests that those who were heavily reliant on the possibility that higher rates would support sterling further were left empty-handed, as deceleration in inflation eroded expectations of a UK rate increase in 2017. Although the Bank of England has adopted a hawkish tone in recent weeks, today's fall in inflation is likely to ease pressure on the Bank of England taking action, consequently keeping hawks at bay...

Investors should keep in mind that the fundamentals behind sterling's woes remain intact, with sellers potentially exploiting rate hike speculations and dollar weakness to install fresh rounds of selling. From a technical standpoint, a decisive breakdown and daily close below 1.3000 should encourage a further decline towards 1.2850.

1.07pm BST

Time for a recap, for those of just tuning in.

UK inflation fell unexpectedly in June for the first time in nine months as lower fuel prices provided some respite for cash-strapped consumers.

CPI #inflation fell by more than expected in June, to 2.6%. Key downward drivers were falling prices of fuel and recreation & culture. pic.twitter.com/ht7SVbf1DE

"The government must stop this cost of living squeeze.

Many working people are caught in a vice as rising prices crush their pay. Ministers claim they are listening to struggling families. But now is the time to prove it. Britain needs a pay rise across the public and private sector."

"While it is encouraging that inflation was lower this month, we appreciate that some families are concerned about the cost of living. That's why we have introduced the national living wage, which is helping to boost earnings by 1,400 a year, and why we've cut taxes for millions of people to help them keep more of what they earn. We are also increasing our free childcare offer to help 400,000 working parents."....

Our pay packets aren't keeping up with rising prices despite the UK's unemployment rate reaching its lowest level since 1975. This is tightening the squeeze on UK households, which is bad news for an economy that relies on confident consumers spending on goods and services.

"Despite a drop in the headline rate of inflation, many families will still be facing the same relentless pressure to make ends meet. The cost of food, household goods and furniture all became more expensive in June and with wage growth still flat those at the bottom will continue to turn to credit or rapidly deplete savings just to keep food on the table.

Inflation lower than expected at 2.6%. Sterling falls in response. pic.twitter.com/OniYRaa75J

1.06pm BST

Our economics editor, Larry Elliott, says consumers should cheer today's inflation data:

Firstly, it means the squeeze on real incomes in 2017 and 2018 will be less severe and less pronounced than some have feared. Secondly, it removes the threat of an interest rate rise from the Bank of England. An August increase in the cost of borrowing, while never looking all that likely, is now off the agenda.

Surprise drop in UK inflation is good news for consumers | Larry Elliott https://t.co/R1zWqQqNkE

12.47pm BST

Danske Bank economist Conor Lambe fears that Britain's wage squeeze is hurting economic growth.

And we could get the proof next Wednesday, when growth figures for the April-June quarter is released.

"The CPI inflation rate in the UK was 2.6 per cent in June 2017, lower than the 2.9 per cent observed in May. This fall was mainly due to lower fuel prices.

"The latest labour market data showed that the rate of nominal wage growth over the year to March-May 2017 was 2 per cent. Therefore, despite today's fall in the inflation rate, real wage growth is still in negative territory.

12.39pm BST

Here's a handy chart, showing how expectations of a UK interest rate rise this year have fallen:

UK CPI comes in at 2.6% vs consensus of 2.9%. Probability of a #BoE hike in Nov fallen from >50% on 1st July to 35% https://t.co/sFTxXBGRAo pic.twitter.com/AdmjNgHKVs

12.02pm BST

The Office for National Statistics has also reported that house price inflation has slowed.

Average house prices in the UK rose by 4.7% in the year to May 2017, down from 5.3% in the year to April 2017.

11.58am BST

Guardian Business has launched a daily email.

Besides the key news headlines that you'd expect, there's an at-a-glance agenda of the day's main events, insightful opinion pieces and a quality feature to sink your teeth into each day.

11.10am BST

Nick Leung, research analyst at fund manager WisdomTree, says there are three reasons inflation dropped last month:

"Today's inflation reading is slightly softer than expected, underpinned by a combination of oil price weakness, a stabilising pound and import-cost induced inflationary pressures undermining consumers' debt-fuelled spending power."

11.04am BST

As long as wages are subdued, rising inflation is clearly bad news for families.

James Brown, Partner and head of the UK Consumer & Retail practice at Simon-Kucher & Partners, explains why:

Whether families decide to register the children to a kids' club or summer camp, or whether groups of friends meet for drinks, they will have to pay more for it than they did last year. The figures for June showed that fees for recreational and sporting services went up by 3.5% and beer is 7.5% more expensive than last year.

10.59am BST

Britain's inflation target is 2%, so the Bank of England still faces some pressure to consider raising interest rates to push down the cost of living.

Calum Bennie, Scottish Friendly's savings specialist, explains:

As long as this squeeze continues the Bank of England faces a difficult balancing act. While on the one hand raising interest rates may help to combat inflation, on the other it will cause real pain for homeowners who could see the cost of their mortgages rise."

10.56am BST

The drop in inflation in June may show that the cost of living squeeze is rippling through the economy, and making it hard for shops to raise prices.

Ipek Ozkardeskaya of London Capital Markets explains:

The slowdown in inflation suggests that the decline in British real wages may have started to translate into a slower consumer inflation, as anticipated by the Bank of England (BoE) Governor Mark Carney.

#BoE #Carney certainly feeling like a King after #UK #inflation release.#GBP hit by softer inflation, #AUD soars https://t.co/oQmT1RUypo pic.twitter.com/CZRN7otEJ3

10.29am BST

Here's the Treasury's comment on today's inflation figures:

'While it is encouraging that inflation was lower this month, we appreciate that some families are concerned about the cost of living. That's why we have introduced the National Living Wage, which is helping to boost earnings by 1,400 a year, and why we've cut taxes for millions of people to help them keep more of what they earn.

We are also increasing our free childcare offer to help 400,000 working parents.'

10.16am BST

The Unison union is also alarmed that wages are still being eroded by rising cost of living.

UNISON assistant general secretary Christina McAnea says public sector workers deserve better:

"With inflation much higher than wages, nurses, teaching assistants and care staff are getting poorer.

"The government's harsh approach to public sector pay is completely out of step with the public mood.

10.11am BST

Ben Brettell, senior economist at Hargreaves Lansdown, says the odds of a UK interest rate rise in August have shrunk.

He writes:

UK inflation fell unexpectedly in June to 2.6%, easing the pressure on squeezed household budgets and substantially reducing the likelihood of an August interest rate rise. The ONS said the drop was largely due to falling motor fuel prices, although core inflation - which strips out the more volatile components such as fuel and food - also fell, to 2.4%.

The news sent the pound sharply lower as currency traders adjusted their outlook for interest rates. The Bank of England's rhetoric has taken an increasingly hawkish tone in recent weeks, with Mark Carney himself saying at the end of last month that "some removal of monetary stimulus is likely to become necessary". Chief economist Andy Haldane also indicated he might support a rate rise this year. However if today's pullback in inflation marks the start of a sustained decline, the pressure on the Bank to raise rates will ease.

10.07am BST

You can read the inflation report online, here.

10.06am BST

This chart shows clearly how UK pay packets aren't keeping up with the cost of living, despite June's unexpected drop in inflation.

"Today's inflation numbers show CPI inflation rising from 0.5% in June 2016 to 2.6% a year later - that's more than a five-fold increase in only a year. While inflation has eased back from May's reading of 2.9%, thanks largely to a fall in the oil price driving down the cost of fuel, this will be cold comfort for Britain's cash strapped consumers - inflation is still well above the Bank of England's 2% target rate and outpacing our earnings.

"Last week's wage growth figures show regular pay growing at just 2.0% for the three months to May, confirming that our pay packets aren't keeping up with rising prices despite the UK's unemployment rate reaching its lowest level since 1975. This is tightening the squeeze on UK households, which is bad news for an economy that relies on confident consumers spending on goods and services. Retail sales figures out on Thursday will provide a telling health check on just how spending is fairing given the mounting pressure on British households.

10.00am BST

No prizes for spotting the moment that the inflation data was released.....

Sterling slides a full cent to $1.3020 as UK inflation posts its biggest fall in over 2 years and throws a spanner in the rate hike works. pic.twitter.com/pSw7jizc1o

9.59am BST

Katie Schmuecker of the Joseph Rowntree Foundation says the inflation squeeze is hitting poorer Britons the hardest:

Good news: inflation down a bit. Bad news: it's still 2.6% while benefits and tax credits are frozen. Result: squeeze at the bottom

9.55am BST

TUC General Secretary Frances O'Grady isn't celebrating the drop in inflation.

She points out that Britons are still suffering from falling real wages, and urges the government to ditch its 1% cap on public sector pay rises.

"The government must stop this cost of living squeeze. Many working people are caught in a vice as rising prices crush their pay.

"Ministers claim they are listening to struggling families. But now is the time to prove it. Britain needs a pay rise across the public and private sector."

9.52am BST

ITV's Robert Peston reckons that inflation has been dampened by the slowing UK economy:

Inflationary pressure in economy has been overstated, with headline rate down from 2.9% to 2.6%. Unsurprising given economic sluggishness

UK inflation falls to 2.6% in June from 2.9% - the biggest decline in inflation since Feb. 2015.

Inflation 3.5% on RPI count(incl housing) used by pay negotiators so still nasty cut in value of most wages & living standards. CPI 2.6%

9.47am BST

This chart shows how the cost of transport, and recreation activities, both dropped last month:

9.40am BST

The pound has fallen sharply since the inflation data was released, shedding all this morning's gains.

Sterling has dropped to $1.3028, almost a cent lower.

9.39am BST

This is the first time UK inflation has fallen since last October.

This chart shows how the consumer prices index (in yellow) had rising pretty steadily since last summer:

9.36am BST

The drop in inflation last month is mainly due to falling petrol prices, says the Office for National Statistics.

9.31am BST

Breaking! Britain's inflation rate has fallen to 2.6% in June, down from 2.9% in May.

That's a smaller reading than expected; City has expected inflation to remain at last month's four-year high.

9.28am BST

Tension is rising in the City, as traders get ready for the inflation figures to hit the wires....

Stand by your beds, UK inflation data up in 10 minutes! June CPI expected +0.2% m/m, +2.9% y/y. How exciting! ;)

Stand by your desks! UK inflation data is on its way #CPI #RPI

9.25am BST

If inflation remains at a four-year high of 2.9% in June, or even goes higher, it will intensify the debate about when UK interest rates should rise (for the first time since 2007).

Danny Blanchflower and Andrew Sentance, both former members of the Bank's rate setting monetary policy, (and long-term opponents in economic theory) have been outlining their differing views on the BBC's Radio 4 Today programme.

"I think inflation is going to go up eventually this year to over 3% and that's squeezing the living standards of workers and people throughout the economy and I think the worry that I would have is that the bank of England hasn't responded at all to this situation. It can do something about it. If it gradually raised interest rates that would help support the value of the pound so we would get less imported inflation and that might take some of the pressure off consumers."

"Here Andrew goes again he's been saying the same thing for the last 10 years. This is precisely the wrong thing to do.

"Why would you want to have a self-inflicted wound at a time when Brexit negotiations is taking place, we've no idea how it's going to be resolved and that's obviously a big problem, firms are sitting thinking what the heck is going to happen. So if you start to raise rates now this is precisely the wrong time to do it. Waiting and watching is sensible. My suspicion is this inflation is temporary and it will start to drop away."

9.14am BST

Zing! The pound just hit a fresh 10-month high against the US dollar.

Sterling nudged $1.3126 for the first time since September 2016, as Trump's healthcare setbacks continue to weaken the dollar.

9.03am BST

City broker Panmure Gordon hopes that the worst of Britain's inflation surge may be coming to an end.

They told clients this morning that the jump in import prices, following the Brexit vote, seems to have peaked a few months ago. That should mean that inflationary pressures ease a little.

8.49am BST

Economist Rupert Seggins is tweeting some useful charts on inflation:

(1/4) UK inflation today. Consensus is for a 2.9%y/y change in consumer prices in June, same as May. Still means a pay squeeze. pic.twitter.com/uyymUr2LVf

(2/4) Oil price growth has slowed down sharply, meaning less pressure on UK transport price inflation in June. pic.twitter.com/gpJG3fyFkf

(3/4) World food price growth is also slowing. Should limit UK price rises in June with further cooling in the coming months. pic.twitter.com/RFu2UUGexn

(4/4) This is the big one to watch. Core UK price inflation. Pass through from sterling has a way to go yet. pic.twitter.com/ACIKnkXH2E

8.49am BST

Some City economists have predicted that UK inflation could rise to 3% this morning.

If so, that could send the pound soaring as it would intensify the pressure on the Bank of England to consider raising interest rates.

If headline inflation hits 3% or above, this will indicate a high chance of hiking rates when the BoE meets in August. However, if the numbers pull back, this would ease pressure on the central bank and traders will turn their attention to the Brexit talks.

8.29am BST

The pound has risen over $1.31 in early trading, up almost half a cent.

That's close to last week's 10-month high, ahead of today's inflation report.

Dollar slumps to a 10-month low after setback on U.S. health-care bill https://t.co/uEGulxj8NA pic.twitter.com/XQvdfDUlPh

Euro above $1.15, highest since May last year. Up 10% this year. Big test of ECB/periphery tolerance now. pic.twitter.com/QhLmpZboGq

8.02am BST

Good morning, and welcome to our rolling coverage of the world economy, the financial markets, the eurozone and business.

The cost of living squeeze is one of the hottest topics in Britain today, thanks to the decline in the pound last year and the government's public sector pay squeeze.

UK CPI inflation probably held steady at 2.9% in June. Yes, fuel prices fell back, but food inflation likely jumped in response to lower : pic.twitter.com/oyWXLaSu4R

Inflation was running at 0.6% when the UK voted to leave the EU in June 2016 but it has risen subsequently as a result of higher oil prices and dearer imports caused by the 12% decline in the value of the pound over the past 12 months.

That has taken the annual inflation rate to its highest level in four years and close to the level where Mark Carney, the governor of the Bank of England, would be forced to write a letter to the chancellor, Philip Hammond, explaining why Threadneedle Street had failed to keep the annual increase in the cost of living to within one percentage point of the government's 2% target.

UK inflation figures will shine light on impact of pound's Brexit slidehttps://t.co/xqEgBEVDwt

Source	RSS or Atom Feed
Feed Location	http://feeds.theguardian.com/theguardian/business/economics/rss
Feed Title
Feed Link	http://feeds.theguardian.com/