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The Bank of England may have missed its chance to increase interest rates as UK inflation stalls at 2.4% despite rising petrol prices.
Figures from the Office of National Statistics (ONS) showed the consumer price index (CPI) rate of inflation remained at 2.4% for the second month in a row, confounding expectations that it would increase to 2.5% or even 2.6%.
Despite a weak pound and rising oil costs, which has pushed up the price of petrol to its highest level in three years and increased the cost of airfares, these rises have been offset by the falling cost of sweets, chocolates and computer games.
While consumers may be pleased that their money will go further, the stagnant inflation rate confirms an underlying weakness in the UK economy, especially when taken in the context of lower than expected wage growth and weak manufacturing data.
The rate of inflation will also pose a problem for the Bank of England’s monetary policy committee (MPC) and raises concerns about whether it should have raised the base rate.
Tom Stevenson of Fidelity International said the Bank was desperate to increase the rate from the current level of 0.5% in order to have room to manoeuvre during the next downturn.
‘If interest rates remain close to zero, the central bank will struggle to offset a slowing economy when it needs to,’ he said.
‘With inflation heading back to target, and the link between buoyant employment and price rises now apparently broken, the Old Lady looks increasingly powerless to act.’
The next date the Bank has to raise rates is August when the next inflation report is due, but Stevenson said governor Mark Carney (pictured) will be cautious about raising hopes of a rate hike, which the Bank did when it failed to follow through on May’s expected rate rise.
‘Carney will be nervous about providing any more misleading forward guidance,’ he said. ‘If real wage growth continues to stutter, inflation falls back from here, and economic activity remains subdued then we could see the Bank put off its decision to raise interest rates to next year.’
Thomas Wells, manager of the Smith & Williamson Global Inflation-Linked Bond fund , agreed that rates were unlikely to rise this year.
‘UK inflation remains above target but should be better behaved as we head into the latter part of the year,’ he said.
‘The Bank would clearly like to have some meaningful firepower in its pocket for when the next slowdown comes, but it increasingly looks like UK interest rates might not go up this year.’
Wells added that it was ‘more worrying’ that wage growth had softened while inflation is still healthy. ONS data this week revealed that UK wage growth had fallen short of expectations in April, growing just 2.5% year-on-year for the three months to April – down from 2.6% in March.
‘One would not expect that at this stage of the cycle,’ said Wells.
There was a muted reaction to the inflation news, as the pound ticked down slightly and the FTSE climbing marginally. Although inflation was expected to push up, Hargreaves Lansdown senior economist Ben Brettell said the unchanged number ‘masks a few details which could show inflationary pressure is beginning to build’.
‘Output price inflation rose for the first time in six months, with prices rising 2.9% in the year to May, compared with 2.5% in April,’ he said. ‘Companies’ raw material costs jumped 9.2% on the year.’
He said this should be enough to push forward the case for a rate rise but other data has put the Bank on the back foot.
‘Overall, I think the MPC will want confirmation that the first quarter growth figure was just a blip before raising borrowing costs,’ said Brettell.