UK Inflation drops to 2.8 per cent in July

LONDON – Inflation in the U.K. slipped back slightly last month largely because of lower clothing prices and an easing in the rate of growth of airfares, particularly of long haul flights, official figures showed Tuesday.

The Office of National Statistics said consumer prices were 2.8 per cent higher in the year to July, down from the 2.9 per cent rate in June. Higher petrol prices prevented the overall rate from falling by more.

Howard Archer, chief European economist at IHS Global, said inflation may rise back toward the 3 per cent mark in the near-term as favourable base effects drop out of the annual comparison and following the recent spike in oil prices. However, he said inflation should start to head downward toward the end of 2013, though that will likely depend on what happens with oil prices.

“While growth has improved markedly recently, we believe that underlying inflationary pressures should still be held down by significant excess capacity and ongoing muted wage growth given appreciable labour market slack,” Archer said.

Inflation has remained stubbornly above the Bank of England’s 2 per cent target since December 2009 — though it was at a 14-month high in June.

Bank of England Gov. Mark Carney revealed last week that the benchmark 0.5 per cent interest rate will not rise until unemployment has dropped below 7 per cent — but underscored that the link to unemployment will be cut should inflation rise out of control.