theguardian.com, Tuesday 19 August 2014 10.20 BST
CPI fall surprises forecasters who expected smaller dip as clothes discounting and drops in alcohol prices and bank charges fuel decrease
Food prices have fallen, helping to cut CPI inflation in July to 1.6%. Photograph: Alamy
The UK's annual inflation rate fell more sharply than expected in July, dimming the prospects of an interest rate rise in 2014.
The consumer prices index fell to 1.6% from 1.9% in June, marking the seventh month in a row that annual inflation has registered below the Bank of England's 2% target, according to Office for National Statistics data.
Economists had expected a smaller fall to 1.8%.
The larger-than-expected drop was driven mainly by greater summer price discounting among clothing retailers than is usual at this time of year. Clothing and footwear prices fell by 5.7% between June and July, compared with a smaller fall of 3.2% during the same period last year. Prices were slashed on a wide range of items, including trousers, coats and jumpers.
Alcohol prices, the cost of some financial services including bank overdraft charges, and food also contributed to the fall.
A Treasury spokesman gave credit for the fall in inflation to the government. "The government's long-term economic plan is working, with today marking the seventh consecutive month that inflation has been below the Bank of England's two per cent target.
"But the effects of the great recession are still being felt and so we have taken continued action to help with the cost of living, including cutting income tax, freezing fuel duty and reducing the costs of childcare. The job is not yet done so the government will go on making the realistic assessment of what needs to be done to deliver a brighter economic future."
The news was not all good for consumers, who face average rail fare rises of 3.5% in 2015. The July inflation rate on the retail prices index (RPI) measure is used to calculate rail fare rises, and dropped to 2.5% last month from 2.6% in June. Increases are traditionally capped at RPI+1% – although train operators may raise fares on some routes by an extra 2%. That means some rail fares could increase by up to 5.5%.
Mark Carney, the Bank of England governor, has given mixed messages in recent weeks on the likely timing of a first increase in interest rates, which have left been on hold at 0.5% since March 2009. Economists said lack of inflationary pressure in the UK, coupled with weak wage growth, made a rate hike in 2014 less likely.
James Knightley, economist at ING, said: "On the face of it this supports an on-hold stance from the Bank of England. The combination of sterling strength (making imported goods cheaper), along with weak wage growth and lower energy prices, which are limiting business cost growth, means inflation looks set to remain contained for now.
"This further eases the pressure on the Bank of England to consider near-term interest rate rises and pushes the balance more in favour of a delay to rate hikes versus our current November official view for the first policy tightening move."
Despite below target inflation, household budgets remain under pressure because wage growth has lagged behind the inflation rate for the vast majority over the past six years.
Pay growth including bonuses fell by 0.2% between April and June compared with a year earlier. Stripping out bonuses, pay was 0.6% – less than a third of June's 1.9% inflation rate.
Cathy Jamieson, Labour's shadow Treasury minister, said: "While this fall in the rate of inflation is welcome, the squeeze on working people continues."
The pound fell against the dollar and the euro after the July data was published, as investors interpreted it as a sign that rates would stay on hold into 2015.
The pound fell to $1.6634, its lowest in more than eight months, while the euro rose 0.4% to 80.25p.
