U.K. Inflation Holds at 2.6%; Pound Slips as Rate Hike Bets Retreat
U.K. inflation was largely unchanged last month, the Office for National Statistics said Tuesday, sending the pound lower against the U.S. dollar as investors trim rate hike bets from the Bank of England.
The ONS said consumer prices in the U.K. accelerated at a 2.6% clip in July, unchanged from the June reading but slightly slower than the 2.7% pace forecast by economists. So-called core inflation, which strips out volatile prices for food and energy, was unchanged from the June reading at 2.5%
"All else being equal, the depreciation of sterling seen in 2016 and particularly following the outcome of the EU referendum would increase the prices producers pay for imported goods," the ONS said. "Whilst depreciation is likely to increase the cost of imports, other factors determine whether these are passed on to consumers. For example, there were reports of businesses having measures to protect against exchange rate changes in the short-term."
The pound fell around 0.4% against the dollar to change hands at 1.2909, the lowest since July 14, before paring the decline to around 1.2922 by 09:40 London time.
Sterling has fallen more than 13.8% against the greenback since the country voted to leave the European Union on June 23, 2016, sending consumer prices soaring more than 200 basis points as import goods costs surged and wages fell flat.
Earlier this month, the Bank of England reiterated its view that inflation is likely to overshoot its 2% target, a view that "reflects entirely the effects of the referendum-related falls in sterling."
"As the effect of rising import prices on inflation diminishes, domestic inflationary pressures gradually pick up over the forecast period. As slack is absorbed, wage growth is projected to recover," the Bank said. "In addition, margins in the consumer sector, having been squeezed by the pickup in import prices, are projected to be rebuilt. Consequently, inflation remains at a level slightly above the 2% target."
The ONS also revealed that its Retail Price Index, a measure that British lobby groups use to negotiate wages, accelerated to 3.6%. That figure could prove controversial, however, given that U.K. rail fares are linked to RPI rates, and thus train operators will be able to increase ticket prices by 3.6% in January 2018.
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