The fall in annual consumer price inflation from 3.4% in May to 3.2% in June reflects a slowdown in fuel costs. "Core" trends remain stubborn, with a recent acceleration in services inflation providing further evidence that spare capacity is failing to exert the dampening impact expected by the Monetary Policy Committee.
Other points:
- CPI inflation averaged 3.44% in the second quarter versus the Bank of England's 3.30% estimate in the May Inflation Report. This is the fifth quarter out of the last six that the Bank has underestimated current-period inflation.
- "Core" inflation excluding energy, food, alcohol and tobacco moved back up to its recent high of 3.1% from 2.9% in May.
- Core resilience reflects a pick-up in services inflation from 3.0% in January to 3.9% currently. Inflation optimists argued that services trends would slow in response to excess capacity, with a weak exchange rate having less offsetting impact than in manufacturing. The recent acceleration, however, had been suggested by business surveys – see chart.
- Goods inflation, excluding energy and food, has fallen from 3.3% to 1.9% since January, partly reflecting a stabilisation of the exchange rate. Imported pressures, however, remain strong, with manufactured import prices rising by 5% in the first five months of the year, according to May trade figures released last week.
- The Bank is likely to be forced to revise up its forecasts of 2.54% and 2.28% in the third and fourth quarters significantly in the August Inflation Report. On conservative assumptions, inflation may average 2.75% in the fourth quarter before returning to 3% in early 2011 as VAT is raised.
- The second-quarter outturn of 3.44% compares with a central projection of 0.73% a year earlier in the May 2009 Inflation Report. Bank officials have deflected criticism of this forecasting failure but an internal review may be under way, with the Bank's recent Annual Report stating that the budget contains an allowance for expenditure of £2.4 million on a "new forecasting model".
