The rate of inflation fell unexpectedly to 2.6% in June from 2.9% the previous month, led by lower oil prices.
The figures, from the Office for National Statistics (ONS), are significant as they show not only an easing in the squeeze on living costs but also take pressure off the Bank of England to raise interest rates to combat rising prices.
The pound immediately fell half a cent against the dollar in response – taking sterling to $1.3028, having hit $1.31 earlier in the session.
Its recent strengthening, to levels not seen since last September, has been partly down to increased expectations of a hike in the Bank rate from its record low of 0.25%.
It has also been a factor in helping oil costs, priced in dollars, fall. Those lower oil prices are then reflected at the petrol pump.
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Jonanthan Athow, ONS deputy national statistician, said: “Today’s fall in inflation is mainly due to drops in petrol and diesel prices. However, the rate remains higher than in the recent past.”
The ONS said an easing in the cost of computer games and equipment, which contributed to rising inflation in May, also helped bring the rate down last month.
Economists had largely expected inflation to remain static in June – perhaps even hit 3% – as prices continue to feel the effects of weaker sterling since the Brexit referendum which has pushed up import costs.
It has meant that those increases, when passed on to consumers, raise their bills at a time when wage growth is under pressure.
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That squeeze on household budgets does appear to have eased – at least temporarily – with the ONS measuring wage growth, excluding bonuses, at an annual rate of 2% in May.
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Ben Brettell, senior economist at Hargreaves Lansdown, said the surprise figures substantially reduced the likelihood of an August interest rate rise.
The news sent the pound sharply lower as currency traders adjusted their outlook for interest rates.
The Bank of England’s rhetoric has taken an increasingly hawkish tone in recent weeks, with Mark Carney himself saying at the end of last month that “some removal of monetary stimulus is likely to become necessary”.
Rate hike expectations first grew last month when it emerged three members of the Bank’s monetary policy committee had supported raising borrowing costs by 0.25% – but were outvoted.
While one of those policymakers, Kristin Forbes, has since left the committee the Bank’s chief economist Andy Haldane has since also expressed his willingness to change tack.
Source: SKY News