UK Inflation Slows Sharply To 2.0%

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UK consumer price inflation slowed sharply in July to the Bank of England's target, preliminary data from the Office for National Statistics showed Wednesday.

The consumer price index rose 2.0 percent year-on-year following a 2.5 percent increase in June. Economists had forecast a 2.3 percent inflation.

Headline inflation slowed for the first time in five months.

Core inflation, which excludes prices of energy, food, alcoholic beverages and tobacco, slowed to 1.8 percent from 2.3 percent in the previous month. Economists had forecast 2.2 percent.

Clothing and footwear, and a variety of recreational goods and services made the biggest downward contribution to inflation, ONS said.

Meanwhile, higher prices of second-hand cars versus declines last year, led to the largest, partially offsetting, upward contribution to change, the agency added.

Inflation rates continue to be influenced by the low base effect due to the coronavirus lockdown in spring 2020, ONS said.

Capital Economics expect the July's drop inflation to be followed by sharp rises in the next few months, taking inflation to a peak of about 4.5 percent by the end of the year, before easing back below the 2 percent target next year.

"But provided the spike in inflation does not feed through into higher inflation expectations or persistently faster pay growth, we do not think that the Bank of England will respond next year by tightening monetary policy," the firm's economist Ruth Gregory said.

In its latest policy session in early August, the Bank of England hinted at "modest tightening" in a three-year horizon as policymakers expect inflation to temporarily reach 4 percent.

Compared to the previous month, consumer prices were unchanged in July after a 0.4 percent increase in the previous month. Economists had forecast 0.3 percent.

Higher prices in transport were largely offset by price falls for clothing and footwear, and a range of recreational goods.

Output prices increased 4.9 percent year-on-year, which were faster than the 4.4 percent rise economists had forecast. In June, they rose 4.5 percent.

Input prices rose 9.9 percent annually following a 9.7 percent climb in June. Economists had predicted a 9.1 percent increase.

Separately, the ONS reported that house price inflation climbed to 13.2 percent in June from 9.8 percent in May. That is the highest ever annual growth rate in house prices in the UK since November 2004, the agency said.

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