U.K. Inflation Eases Unexpectedly in June -- Update

By Wiktor Szary and Jason Douglas Features Dow Jones Newswires

U.K. consumer inflation slowed unexpectedly in June, new figures showed Tuesday, offering a tentative sign that a lengthy squeeze on households since last year's Brexit vote may soon begin to ease.

Continue Reading Below

The slowdown in the rate of inflation from the near-four-year high the previous month will be welcomed by the U.K.'s Conservative government, which has come under pressure over declining living standards just as it begins to negotiate Britain's exit from the European Union.

The data will also cast doubt over the prospect of an interest rate rise, which some Bank of England officials have signaled might be needed this year to bring inflation back to the bank's 2% goal.

Sterling weakened by nearly 0.2% against the U.S. dollar shortly after the data was published as the prospect of a rate increase faded.

Annual price growth slowed to 2.6% in June, the Office for National Statistics said. This was significantly below the forecast of analysts polled by The Wall Street Journal, who expected it to hold steady at May's 2.9%, its highest since mid-2013.

The June slowdown in inflation was driven largely by falling petrol and diesel prices, government statisticians said, though the price growth rate remained higher than in the recent past and firmly above the Bank of England's 2% target.

Continue Reading Below

Oil prices have slumped this year, particularly in the second quarter, due to a persistent oversupply. Brent crude, the global benchmark, is down around 13% since the start of the year.

This has weighed on inflation across the globe, complicating policy-setting for the world's major central banks. Annual consumer-price inflation in the U.S. was flat in June at 1.4%. Low inflation is one reason for the Fed to move cautiously with interest-rate increases, though officials say the phenomenon is likely to fade.

The Bank of Japan is expected to trim its inflation forecast when officials meet later this week. The European Central Bank also meets, just weeks after ECB President Mario Draghi hinted the ECB might start winding down its stimulus in response to accelerating growth in Europe.

However, other economic indicators published Tuesday suggest that inflation in the U.K., which accelerated sharply in the wake of the pound's Brexit-related depreciation last year, may indeed be tailing off.

Growth in prices of raw materials purchased by manufacturers has been slowing steeply since the beginning of this year, with the annual rate dropping by 10 percentage points since its January peak, to 9.9% last month. Growth in import prices, which are particularly sensitive to currency swings, has seen a similar deceleration.

The core inflation rate, which excludes the most volatile products such as food, alcohol and--crucially--petrol also saw a visible annual drop, to 2.4%, 0.2 percentage point below the May reading.

"The effects of sterling's slide now already appear to be fading at the start of the production line," said Ruth Gregory, U.K. economist at Capital Economics, a London-based consultancy.

While inflation is likely to accelerate still as growth in producer prices makes its way down to the consumers, inflation should now not be too far away from its peak, Ms. Gregory said. This means that the squeeze on real incomes will likely be less severe than the one following sterling's 2008 depreciation, she said.

That would be good news for the mostly domestic-driven U.K. economy. British consumers have seen their wallets squeezed as inflation accelerated sharply since the Brexit vote in June last year, outpacing the tepid growth in wages.

U.K. households suffered the longest sustained decline in disposable income in over four decades in the nine months through March, last month's data showed, highlighting the scale of the living standards squeeze.

As households retrenched, reining in their spending sharply, the economy slowed significantly in the first quarter, growing by a mere 0.2%.

This was down from the 0.7% growth rate seen in the final three months of 2016, and the slowest rate of growth among the Group of Seven developed economies.

Georgi Kantchev contributed to this article.

Write to Wiktor Szary at Wiktor.Szary@wsj.com and Jason Douglas at jason.douglas@wsj.com

(END) Dow Jones Newswires

July 18, 2017 08:16 ET (12:16 GMT)