UK inflation rises to 1 per cent in July

Inflation has risen sharply in the UK after reaching its lowest level since June 2016 in May and June 2020.

Data released by the Office for National Statistics (ONS) shows that headline consumer price inflation (CPI) reached 1 per cent in July up from 0.6 per cent in June.

While 1 per cent inflation is still relatively low (the Bank of England’s target is 2 per cent), it adds to recent news suggesting consumer purchasing power has weakened.

Rising inflation and falling earnings could hold back consumer spending at a critical time in the recovery phase.

The ONS reported that real earnings fell 2.2 per cent year-on-year in June, while average earning fell 1.5 per cent.

CPI was primarily lifted in July by prices for clothing and footwear, fuel, furniture and household goods.

However, it is expected that inflation will fall back in August as the impact of the temporary VAT cut for the hospitality sector is felt.

The EY ITEM Club suspect that inflation could go as low as 0.2 per cent over the next few months, as price-conscious consumers, excess capacity and limited earnings limit the number of cost increases.

In 2021, inflation is expected to rise only gradually to around 2 per cent by the end of the year.

Howard Archer, chief economic advisor to the EY ITEM Club, said: “The near-term fundamentals for consumer spending look challenging.

“Many people have already lost their jobs, despite the supportive Government measures, while others will be concerned that they may still end up losing their job once the furlough scheme ends in October.

“Additionally, many incomes have been negatively affected. This is likely to keep consumers price conscious for some time, even though the economy is now recovering.

“Limited earnings will also have a dampening impact on inflation.”