Bank of England Governor Mark Carney gained ground in the central bank’s lengthy battle against inflation today as the cost of living eased back from its 14-month high in July.
The Bank’s Consumer Prices Index benchmark eased from 2.9% to 2.8% last month — dragged lower by deeper high street price-cutting and smaller rises in airfares, despite more pain at the petrol pump for motorists.
The easing pressure from the cost of living offers some relief for stretched household budgets. But jobs figures are set to show wage growth lingering far below the rate of inflation, tempering a recovery in consumer spending despite much stronger recent news on the economy.
Scott Corfe, senior economist at the Centre for Economics and Business Research said: “With annual earnings growth languishing below the 2% mark, where we expect it to remain until 2015, households will still see their spending power eroded for some time.”
The Bank’s Monetary Policy Committee has failed to hit its 2% inflation target since December 2009 as a combination of VAT hikes, higher energy prices and tuition fees keep the CPI high. Carney warned last week that inflation would remain around current levels “in the near term” and does not expect the cost of living to hit its target until the end of 2015.
Savers are meanwhile being punished with only one of 804 savings accounts on the market allowing basic rate taxpayers to offset the effects of tax and inflation, according to financial information firm Moneyfacts.co.uk. Finance expert Rachel Springall said: “These are dark days for savers.”
There was better news for Carney in the detailed figures which showed core inflation — excluding volatile food energy and tobacco prices — falling from 2.3% to 2% last month. Rob Wood, chief economist at Berenberg said: “Right now inflation is being boosted by large contributions from effectively government-set prices. Tuition fees alone are adding 0.4%, while rail fares are up 4.5% on a year earlier, for instance. In reality inflation remains well under control, which should become increasingly evident over the next year or so.”
Official factory gate price data meanwhile showed output prices growing at an annual rate of just 2.1% in July despite renewed pressure on input costs from crude oil, imported food and fuels —showing manufacturers reluctant to push through price increases. Capital Economics’ Martin Beck said: “Price pressures at the very start of the inflation pipeline remain subdued.”