Cheaper hotel rooms, summer clothing bargains and cuts in the cost of alcohol helped peg the UK’s annual inflation rate at 0.6% last month.
Confounding City fears of a small rise in the cost of living, the Office for National Statistics said price falls had cancelled out increases in the cost of food, air fares and smaller reductions in fuel than in August 2015.
Economists had predicted that the annual inflation rate as measured by the Consumer Price Index would edge up to 0.7% or 0.8% in August due to imports becoming more expensive following the post-Brexit drop in the value of sterling.
The ONS said there was some evidence that a cheaper currency was pushing up the cost of fuel and raw materials for manufacturing – an early indicator of inflationary pressure – but this had not fed into more expensive prices for consumers.
Mike Prestwood, the ONS’s head of inflation, said: “Fuel costs falling more slowly than a year ago as well as rising food prices and air fares all pushed up CPI in August, but these were offset by hotels, wine and clothing leaving the headline rate of inflation unchanged.
“Raw material costs have risen for the second month running, partly due to the falling value of the pound, though there is little sign of this feeding through to consumer prices yet.”
Inflation hovered around zero during 2015 but started to rise in the early months of 2016. Further increases are expected in the coming months as last Autumn’s sharp fall in oil prices cease to have a downward impact.
The ONS said so-called core inflation, which strips out food, fuel, alcohol and tobacco, also remained unchanged last month, at 1.3%.
Indications of inflation in the pipeline came from the ONS’s Producer Price Index, which measures manufacturers’ fuel and raw material costs and the prices charged by industry to wholesalers and retailers.
Factory gate prices rose by 0.8% in the year to August, up from 0.3% in July. The ONS said the rises in the past two months followed two years of falling output prices.
Meanwhile, the cost of industry’s fuel and raw materials rose by 7.6% in the year to August, up from 4.1% in July. The ONS said this was largely the result of a big drop in oil prices in August 2015 ceasing to have a helpful impact.
Scott Bowman, UK economist at Capital Economics, said CPI inflation was likely to rise to 2% by the middle of 2017 and hit 3% by the end of that year.
“CPI inflation should resume its upward journey in coming months. The effects of sterling’s recent fall on import prices will gradually feed through to consumer prices, while the contribution from the previous falls in commodity prices will continue to wane. Indeed, there were signs of these factors starting to make their way through the inflation pipeline.”
