Press release

15 Jul 2020 London, GB

Consumer Price Inflation edged up to 0.6% in June but further declines look likely – EY ITEM Club comments

Consumer price inflation surprisingly edged up to 0.6% in June from 0.5% in May, which had been the lowest level since June 2016.

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  • 0.6% is still reasonable news for consumers’ purchasing power, and is all the more helpful given recent weaker earnings. Latest ONS data show average earnings fell 0.9% year-on-year in April. The ONS also reported that real earnings fell 1.7% year-on-year in April and were down 0.4% year-on-year in the three months to April
  • Inflation was primarily lifted in June by higher prices for recreation and culture (particularly computer games), and for clothing as prices fell less this June than a year ago due to the timing of summer sales being distorted by the lockdown
  • Core inflation rose to 1.4% in June from 1.2% in May (the lowest since October 2016)
  • The main downward impact on inflation in June came from food and non-alcoholic prices, while there was also some downward impact from motor fuels
  • Inflation is currently difficult to measure due to the restrictions caused by COVID-19, as has been stressed by the ONS – although the situation eased slightly in June. The ONS reported that prices were unavailable for 16% of its inflation basket in June
  • Despite rising in June, the EY ITEM Club still expects inflation to fall over the next few months – it could get as low as 0.1%. The temporary VAT cut from 20% to 5% in the hospitality sector for six months from mid-July will add to near-term downward influences currently coming from limited demand
  • Evidence of limited price pressures further down the supply chain was evident in producer input prices falling 6.4% year-on-year in June, although they rose 2.4% month-on-month. Meanwhile, producer output prices were down 0.8% year-on-year despite rising 0.3% month-on-month
  • The EY Item Club expects inflation to rise gradually during 2021 as the recovery gains traction. It is unlikely to rise sharply next year and could be around 2.0% by the end of 2021
  • With inflation well below target and the economy seeing unexpectedly slow growth in May, the EY ITEM Club suspects the Bank of England will announce further asset purchases at the September or November MPC meetings, most likely around £100 billion
  • The EY Item Club continues to doubt the Bank of England will take interest rates down from the current record low level of 0.10%, although it is actively reviewing the case for negative interest rates, having long considered they were not suited to the UK

Howard Archer, chief economic advisor to the EY ITEM Club, says:

“Consumer price inflation edged up to 0.6% in June from 0.5% in May, which had been the lowest level since June 2016. Inflation had previously fallen back to 0.5% in May from 0.8% in April, 1.5% in March, 1.7% in February and a six-month high of 1.8% in January. Consumer price inflation averaged 1.8% over 2019, down from 2.5% in 2018 and 2.7% in 2017.

“At 0.6% in June, consumer price inflation was more than one percentage point below the Bank of England’s 2.0% target rate.

“Inflation was primarily lifted in June by higher prices for recreation and culture (particularly computer games), and for clothing as prices fell less this June than a year ago. Normally clothing prices fall in June due to the summer sales but the pattern this year has been disrupted by coronavirus restrictions.

“Core inflation rose back up to 1.4% in November after dipping to 1.2% in May (the lowest since October 2016) from 1.4% in April.

“The largest downward impact on inflation in June came from food and non-alcoholic beverages where prices fell 0.6% month-on-month compared to a drop of 0.1% in June 2019.

“There was a downward impact of 0.41 percentage point from motor fuels prices in June. The ONS reported that average petrol prices stood at 106.5p/litre, slightly higher than 106.2p/litre in May, which was the lowest price observed since April 2016. Average diesel prices were 112.7p/litre in June, the lowest since August 2016. However, there was some upward impact from other transport components.

“The Office for National Statistics indicated that inflation is currently difficult to measure due to the restrictions caused by coronavirus – although the situation improved a little in June. The ONS commented: “we identified 67 CPIH items that were unavailable to UK consumers in June; these account for 13.5% of the CPIH basket by weight and made a downward contribution of 0.02 percentage points to the change in the CPIH 12-month rate; the number of unavailable items is down from 74 in May and 90 in April; for June, we have collected a weighted total of 84.0% (excluding unavailable items) of the number of price quotes collected for February (the most recent "normal" collection).”"

Outlook for Inflation

Howard Archer adds: “Despite edging up in June, the EY ITEM Club believes Inflation is likely to fall back further over the next few months and could get as low as 0.1% over the summer.

“Relatively weak demand and price conscious consumers are likely to limit inflation in the near term at least. While the economy has come off its April lows, consumers look likely to be relatively cautious in their spending for some time to come. The near-term fundamentals for consumer spending have taken a downturn as a result of COVID-19. Many people have already lost their jobs, despite the supportive government measures, while others will be worried that they may still end up losing their job once the furlough scheme ends. Additionally, many incomes have taken a hit. This is likely to keep consumers price conscious for some time, even when the economy starts to recover. Limited earnings growth will also have a dampening impact on inflation.

“The temporary VAT cut from 20% to 5% in the hospitality sector for six months from mid-July will add to near-term downward influences currently coming from limited demand.

“Relatively low oil prices should also limit inflation – although the downward impact from lower fuel prices is likely coming to an end. While Brent oil has risen from a near 21-year low of $15.93/barrel on 22 April to currently trade around $43/barrel, it remains at a relatively low level and is still some 37% below the late-January level of $65/barrel. The EY ITEM Club currently expects Brent oil to average around $41/barrel in 2020 and $48/barrel in 2021.

“Evidence of limited price pressures further down the supply chain in June was evident in producer input prices falling 6.4% year-on-year although they rose 2.4% month-on-month. “Meanwhile, producer output prices were down 0.8% year-on-year despite rising 0.3% month-on-month.

“The EY ITEM Club expects inflation to rise gradually during 2021 as the recovery gains traction. It is unlikely to rise sharply next year and could reach around 2.0% by the end of 2021.”