City economists believe there is less pressure on the Bank of England to raise interest rates soon, after the consumer prices index fell last month to 4.2% ? although CPI is expected to rise again later this year
Colin Ellis, chief economist at the British Private Equity and Venture Capital Association
The inflation data will make slightly easier reading for the Bank's monetary policy committee. Headline CPI inflation fell unexpectedly to 4.2% year-on-year in June, from 4.5% in May, but still well above the official target of 2%. Furthermore, any respite will be temporary, as inflation is set to pick back up in the coming months as consumer gas and electricity prices rise. However, with little sign of any second-round effects in the labour market ? Wednesday's data are likely to show earnings growth remaining benign at around 2% ? the MPC looks set to keep interest rates at their record low of 0.5% for at least the rest of this year.
Scott Corfe, economist at the Centre for Economics and Business Research
The most significant negative contribution to the change in the annual rate of inflation came from the recreation & culture component of the index, which fell by 0.9% between May and June this year compared with a rise of 0.5% between the same two months a year ago. Between May and June, there was downward pressure on the price of games, photographic equipment, books and audio-visual equipment. This suggests that the weakness of domestic demand is starting to bear down on inflation, with retailers having to discount the prices of discretionary goods given frail consumer confidence and the ongoing squeeze on household real incomes.
Today's announcement will take some pressure off the Bank of England, which has faced criticism for being too complacent over the issue of inflation, amidst ongoing concerns about the Bank losing credibility over its commitment to a 2% central target for CPI annual growth. Still, inflation hawks will continue to point to the fact that inflation remains over double the Bank's central target and that there are gas and electricity price rises in the pipeline later this year, which could push price growth back up.
Howard Archer, chief UK and European economist at IHS Global Insight
This is a really nice downward surprise on the inflation front that will see the Bank of England breathe a little easier. Not only did headline inflation unexpectedly retreat to a three-month low of 4.2% in June but this was driven by core inflation falling back to a seven-month low of 2.8%. This ties in with reports that a significant number of retailers are engaging in earlier and deeper summer clearance sales to try and get hard-pressed consumers to part with their cash.
It is premature to say we are out of the inflation woods, and much will depend on future oil and food price developments. Food prices continued to have a significant upward impact on inflation in June while it seems inevitable that inflation will spike up around August/September as higher utility bills kick in.
But there is a significantly increased chance that consumer price inflation will now peak below 5% and the latest data will fuel belief within the Bank of England that inflation will fall back markedly from late-2011/early-2012 as the upward impact from VAT developments, high energy, commodity and food prices, and sterling's past sharp depreciation wanes.
Andr� de Klerk, head of advisory at Moneycorp
The Bank's dovish strategy could remain in place for longer than expected as inflation was muzzled for the month of June.
A continued drop in inflation will support the argument that we're not going to see a rate rise this year and most probably not until mid-2012. As the temporary factors that plagued the commodity markets have taken a back seat the wait-and-see approach to the UK economy employed by the Bank shows signs of working. Sterling dropped somewhat against the euro on the back of the news.
With the markets firmly focused on the sovereign debt issue in Italy, the UK inflation data had little effect on the pound.
Source: http://www.guardian.co.uk/business/2011/jul/12/inflation-fall-what-the-experts-say
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