Inflation inches higher but is still well below the Bank of England’s target

“An acceleration in UK inflation to 0.5% year-on-year in June from 0.3% in May gives some potential hint of what the pound’s plunge against the dollar, euro and yen could mean going forward", says Russ Mould, AJ Bell Investment Director. 

“The 0.5% increase in the consumer price index (CPI) exceeded the consensus forecast of 0.4% and took inflation back to the rate last seen in March, even if it remains way below the Bank of England’s 2% target.

“Ultimately, life begins to the left of the decimal point and the key figure here therefore is still “zero”, although Bank of England Governor Mark Carney make take some solace from what seems to be a slight upward trend in both the headline and “core” CPI readings (see chart below).

“Given that a weak pound may help British exporters and nudge inflation higher, Mr Carney’s apparent lack of concern over sterling’s slide makes sense. 

“After all, if a central bank is determined to defend a currency it will usually raise interest rates, to provide a higher yield and tempt investors with higher compensation for the risks involved, but on this occasion the Bank of England Governor is talking about interest rate cuts. 

“All eyes are now on the next Bank of England meeting on 4 August, when a rate cut and addition to the £375 billion Quantitative Easing programme will come under discussion once more.”

Source: ONS

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