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Economists expect UK inflation to head back to zero

Summer clothing sales are expected to have pulled UK inflation back down to zero last month, bringing more relief to households and taking pressure off theBank of England to raise interest rates any time soon.

Economists expect official figures published on Tuesday morning to show inflation on the consumer price index (CPI) measure dipping back to zero in June, from 0.1% in May. Some economists in a Reuters poll forecast prices could even be down on a year earlier, especially if there was widespread and early summer discounting on the high street.

The lowest forecast in the poll is for prices to be down 0.2% on a year earlier. That would mark a return to the negative inflation in April, the first instance in more than half a century.

Bank policymakers have appeared relaxed about inflation being well below their 2% target. The dip into negative inflation had been widely predicted, including by the Bank’s governor, Mark Carney, after a sharp drop in oil prices since last summer. He recently told Britons to enjoy the period of low prices while it lasts.

Economists agree that inflation is likely to rebound but say in the meantime the Bank’s monetary policy committee (MPC) can afford to take its time deciding when to start raising borrowing costs from 0.5%, where they have been for more than six years. Markets are not pricing in a rise until well into 2016.

“Inflation in June will have stayed close to zero – indeed, the UK may even have fallen back into deflation. There are still no signs that low inflation will become permanently embedded. Nonetheless, the benign outlook leaves the MPC plenty of room to leave interest rates on hold for a while longer,” said Vicky Redwood, chief UK economist at the thinktank Capital Economics.

Howard Archer, chief UK and European economist at IHS Global Insight, is predicting inflation of 0.1% in June.

“Some firming in food prices and overall less discounting by retailers than a year ago may well have prevented the UK from suffering a renewed dip into deflation in June, although a renewed softening in oil prices may have exerted some downward pressure on inflation,” he said.

While inflation is well off the government-set target and has been characterised by some government critics as a sign of economic fragility, for households it means they are better off in real terms.

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Official figures on Wednesday are expected to show wages rising 3.3% during the three months to May after growth of 2.7% in the three months to April. That would be the fastest pace for five years and bring relief after years of average pay falling in real terms because it lagged inflation.

“With CPI inflation still hugging zero, real wage inflation of 3% year on year is very robust and great news for consumer spending growth,” said Alan Clarke, a fixed income strategist at Scotiabank.


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