The annual rate of UK consumer price inflation is expected to tick up slightly in June although the record shop price deflation could keep the rate unchanged.
The Consumer Price Index (CPI), measuring inflation in Britain, hit 2% in December last year after five years of above-target price inflation pushing down on household spending. Since then, the CPI rate has been sliding down to hit 1.5% in May.
Low inflation also offer the Bank of England (BoE) more leeway to keep its monetary policy ultra-loose for longer as weak productivity, benign wage growth and a stronger sterling successfully offset other upward price pressures.
In June, economists' central view suggests the annual CPI ticked up slightly to 1.6% as prices of petrol could be one of those pushing the overall index upward. According to the AA Fuel Price Report, rising oil prices continued to push up the pump price of petrol, although a stronger pound has reduced the impact.
However, a record shop price deflation in June could offset those higher fuel prices and eventually keep the annual rate of CPI unchanged at 1.5%.
In its June report, the British Retail Consortium (BRC) reported shop prices had continued to remain in deflationary territory in June and recorded the largest dip since records began in December 2006.
Food inflation slowed down to 0.6%, the lowest on record, while prices of non-food products reported an acceleration in deflation of 3.4%, up from 2.8% seen in May and also the lowest on record, the BRC said.
On the near-term price outlook, Mike Watkins, a head of Retailer and Business Insight, Nielsen said "little in the way of immediate seasonal or weather related price increases is anticipated so the outlook for the next three months is for relatively stable shop price inflation. Helped by the increases in consumer confidence since the start of the year, this should encourage shoppers to spend more freely over the summer months."
Acceleration in shop price deflation may suggest the CPI should remain subdued in the upcoming months in case other seasonal pressures prove otherwise.
In its latest Monetary Policy Committee (MPC) meeting minutes, the BoE revised down its second-quarter inflation expectations. The BoE further reflected what the BRC had been reporting so far, and that "one factor that was likely to bear down on CPI inflation in Q2 was the price cuts announced by major supermarket chains."
The feedback from retailers the central bank used for its research also suggested "a balance of companies had reported that their profit margins had fallen over the past year, but that they expected to rebuild margins a little over the coming twelve months," which may suggest some upward pressure on the CPI further down the road. Still, the BoE's latest Inflation Report suggests the annual rate of CPI should float below the official target of 2% in the next two years.
Inflation expectations had also remained subdued in the second quarter, falling by around 0.3 percentage points at the one-year, two-year and five-year horizons, according to the 2014 Q2 Bank/GfK NOP survey.
The BoE also expects the appreciation of sterling over the past year has meant that import prices were probably starting to pull down CPI inflation.
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