Aberdeen: Inflation figures offer some relief
Felix Feather, Economist at Aberdeen Investments, comments on the UK inflation figures released this morning:
'June’s inflation data offers some welcome relief for policymakers. Lower petrol and diesel prices over the month mean that energy made less of a contribution to inflation than previously, helping to pull the headline rate lower.
However, this relief is likely to be fleeting. Household energy bills have yet to fully reflect this summer’s energy price shock, and the increase in the Ofgem price cap will push inflation higher again in the months ahead. The proposed 5% cut to household fuel VAT will come too late to have an effect in the summer. And when it does arrive, the difference it will make to the inflation outlook will be almost negligible – around 0.1ppt off the headline rate.
As a result, we still expect inflation to move back above current levels over the remainder of the year, eventually breaching 3% even if tensions in the Middle East moderate.
However, the more important signal for the Bank of England is coming from domestically generated inflation. Labour market conditions have softened, wage growth is slowing and there remains limited evidence of the kind of second-round inflation effects that would concern policymakers. That should help prevent the energy-driven rise in inflation from becoming entrenched.
While inflation is likely to remain above the Bank's 2% target for some time yet, the medium-term outlook is more sanguine. As the temporary impact from higher energy costs fades over 2027 and 2028, inflation should resume drifting lower. Of course, if the energy cost shock does not unwind, inflation would follow a higher-for-longer path.'