Food price wars and summer sales put lid on rate rise

Supermarket price wars and high street summer sales combined to drive inflation sharply lower in July, easing the pressure on the Bank of England to press ahead with early interest rate rises.

Threadneedle Street’s official benchmark of inflation, the consumer prices index (CPI), eased from 1.9 per cent to a lower-than-anticipated 1.6 per cent last month, remaining below the Bank’s 2 per cent target for the seventh month in a row.

The Office for National Statistics put the drop down to a third successive month of falling food and drink costs as the UK’s major grocers scrap for shoppers and fend off discount rivals against a backdrop of falling commodity prices.

Promotions from retailers also drove inflation lower as summer sales have come later in the year, after companies were forced into early price-slashing in 2013 after a bitterly cold winter.

Factory gate prices for UK manufacturers meanwhile are lower than a year ago for the first time since 2009 – falling 0.1 per cent in the year to July – due to a plunge in crude oil costs. Brent crude has fallen more than 5 per cent in the past month alone, thanks to increased supply from Libya.

The July RPI figure, which is used to set next year’s regulated rail fares, came in at 2.5 per cent, meaning commuters will face an average rise in ticket prices of 3.5 per cent in January.

The sharp drop in the CPI caught the City off-guard, prompting a sell-off of the pound to a four-month low against the dollar. Experts said the lack of evidence of inflation would stay the hand of the Monetary Policy Committee from a first rate since 2007.

Victoria Clarke, an economist at Investec, said: “The mood music playing at present … is that for now, a late-2014 increase in Bank rate appears to be off the cards. The subdued nature of price trends, both at the factory gate and in terms of headline CPI, should serve to buy the MPC some more time.”

Minutes of the Bank’s August meeting, due on Wednesday, could give further clues.