Britain’s inflation rate unexpectedly slipped back in June according to figures released by the Office of National Statistics Wednesday.
The country’s Consumer Price Index (CPI) fell from 2.7 percent in May to 2.6 percent in June, ending a steady and steep rise in inflation sparked off by the Brexit referendum vote in June last year.
Inflation had been at 0.5 percent in the month before the Brexit vote, which however sparked a sudden and sharp market reaction that saw sterling fall against other currencies.
This fall of about 11 percent in the sterling’s value against the U.S. dollar led to higher commodity prices and higher costs for imports, sending inflation upwards.
However, the fall in inflation is only temporary and will pose a problem for the central bank, the Bank of England (BOE), and its rate-setting Monetary Policy Committee (MPC), experts said.
“The bigger picture hasn’t really changed: despite this month’s blip, inflation is heading towards 3 percent, and economic growth has slowed to below-trend quarterly rates, leaving the MPC with a difficult balancing act,” Sam Hill, economist with Royal Bank of Canada (RBC) in London, told Xinhua.
The effect of the sterling’s depreciation has still not been fully reflected, and there is more upward pressure on inflation to come.
“Although recently the exchange rate has been relatively stable, the lags involved mean last year’s depreciation is still feeding through to higher imported inflation now and over the coming months,” said Hill.
“We think it is appropriate for the MPC to put due emphasis on the downside risks to economic activity, rather than (to) react potentially prematurely to a bout of above-target inflation,” he added.
The next meeting of the MPC is in August. Hill said the committee members would leave the rate at its record low of 0.25 percent, but beyond that time a decision was “very data-dependent and our expectation is still that the activity data will keep the committee from tightening.”