This is not a great surprise and also not a catastrophe for the economy in the longer term. Sterling is around 5.8% stronger than this time last year and the past 12 months have obviously been a significant decline in oil and food prices. The subsequent effect on imports into the UK means that disinflation is piggybacking on every product that we bring in from abroad.
As oil prices recover and last year’s declines fall out of the inflationary basket then this will become less of an issue. We must also remember that wages are now rising by 2% in real terms; great conditions for UK consumers to continue spending through the summer months.
I doubt this will do too much to rate expectations at the Bank of England; since the beginning of the year [Bank governor] Carney and the MPC have warned that a month or two of negative CPI could be seen and we are finally seeing them. I maintain our guidance of a rate increase in March 2016 but votes to come from more hawkish members of the Committee to be seen in the coming quarter.
Sterling has slipped on the announcement, and is down 0.75% against the dollar but remain 0.6% higher against the euro.
Jeremy Cook is chief economist at the international payments company World First