Press release

19 Aug 2020 London, GB

Consumer Price Inflation up to four-month high in July, but set to fall back in August – EY ITEM Club comments

Consumer price inflation came in above all expectations in July, rising to a four-month high of 1.0% from 0.6% in June and 0.5% in May, which had been the lowest level since June 2016.

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Related topics Growth COVID-19
  • Consumer price inflation came in above all expectations in July, rising to a four-month high of 1.0% from 0.6% in June and 0.5% in May, which had been the lowest level since June 2016
  • While 1.0% is still relatively low, it adds to recent news on consumers’ weaker purchasing power and follows falling earnings data. Latest ONS data show average earnings fell 1.5% year-on-year in June. The ONS also reported that real earnings fell 2.2% year-on-year in June and were down 2.0% year-on-year in the three months to June
  • RPI inflation rose to 1.6% in July from 1.1% in June; this rise is disappointing for rail commuters as the July RPI rate will be used to set the increase in regulated train fares in January
  • Consumer price inflation was primarily lifted in July by prices for clothing and footwear, fuel and furniture and household goods. Food had a modest downward impact
  • Core inflation rose to 1.8% in July from 1.4% in June and 1.2% in May (the lowest since October 2016)
  • Inflation looks set to fall back in August as the impact of the temporary VAT cut for the hospitality sector is felt. However, the rise in inflation to 1.0% dilutes the chances that it could temporarily turn negative over the coming months, which the Bank of England had suggested is possible
  • The EY ITEM Club suspects inflation could get down to a low of around 0.2% over the next few months. Price conscious consumers, excess capacity and limited earnings are likely to limit inflation in the near term at least
  • There was evidence of limited price pressures further down the supply chain with producer input and output prices falling year-on-year
  • The EY ITEM Club expects inflation to rise gradually during 2021 as the recovery gains traction. Even so, it is unlikely to rise sharply next year and could be around 2.0% by the end of 2021
  • With inflation still below target and the economy still facing uncertainties, the EY ITEM Club suspects the Bank of England will announce a further dose of asset purchases – most likely at the November MPC meeting and in the region of £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 continuing to review the case for negative interest rates

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

“Consumer price inflation surprised on the upside in July as it rose to a four-month high of 1.0% from 0.6% in June and 0.5% in May, which had been the lowest level since June 2016. Inflation had previously trended down to 0.5% in May from a six-month high of 1.8% in January.

“At 1.0% in July, consumer price inflation was one percentage point below the Bank of England’s 2.0% target rate.

“RPI inflation was up to 1.6% in July from 1.1% in June. This rise is particularly disappointing for rail commuters as the July RPI rate will be used to set the increase in regulated train fares in January.

“Inflation was primarily lifted in July by prices for clothing and footwear where the monthly fall was less than normal due to the timing and impact of the summer sales being distorted by COVID-19. Additionally, there was a marked upward impact from prices for furniture and household goods.

“A further upward impact on inflation in July came from motor fuels and lubricants. Between June and July 2020, petrol prices rose by 4.9 pence per litre to stand at 111.4 pence per litre, and diesel prices rose by 4.0 pence per litre to stand at 116.7 pence per litre. In comparison, between June and July 2019, petrol and diesel prices fell by 0.9 and 2.3 pence per litre, to stand at 127.3 and 132.0 pence per litre, respectively. This month’s rise in petrol prices was the largest monthly increase since between December 2010 and January 2011.

“There was a small downward impact on inflation in July from lower food prices.

“Core inflation rose to 1.8% in July from 1.4% in June and 1.2% in May (the lowest since October 2016).

“The Office for National Statistics (ONS) has reported that inflation has been difficult to measure in recent months due to the restrictions caused by coronavirus – although the situation improved in July. The ONS said that 12 items in its ‘basket’ were unavailable to consumers, down from 90 in April.”

Outlook for inflation

Howard Archer adds: “Consumer price inflation looks set to fall back appreciably in August as the hospitality sector’s six-month VAT cut from 20% to 5%, which started in mid-July, takes effect. The EY ITEM Club suspects inflation could get down to a low around 0.2% over the next few months.

“Nevertheless, the rise in inflation in to 1.0% July significantly dilutes the chances that it could temporarily turn slightly negative over the coming months as the Bank of England had suggested is possible.

“Price conscious consumers, excess capacity and limited earnings are likely to limit inflation in the near term at least. While the economy is seemingly recovering relatively well in the third quarter after its record second quarter contraction, uncertainties remain about the longer-term outlook and consumers look likely to be relatively cautious in their spending after the release of some pent-up demand.

“The near-term fundamentals for consumer spending look challenging. Many people have already lost their jobs, despite the supportive government measures, while others will be concerned that they may still end up losing their job once the furlough scheme ends in October. Additionally, many incomes have been negatively affected. This is likely to keep consumers price conscious for some time, even though the economy is now recovering. Limited earnings will also have a dampening impact on inflation.

“Relatively low oil prices should also limit inflation – although the downward impact from lower fuel prices has come 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 $45/barrel, it remains at a relatively low level and is still some 31% 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.

“There was evidence of limited price pressures further down the supply chain in July with producer input prices falling 5.7% year-on-year, although they rose 1.8% month-on-month. Meanwhile, producer output prices were down 0.9% year-on-year as they fell 0.3% month-on-month.

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