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UK inflation holds steady in July as price pressures ease

Key Points
  • The pace at which manufacturers' raw material costs are rising slowed by the most in over five years

  • Consumer price inflation held unchanged at 2.6 percent in July
Shoppers on Oxford Street in London.
Jack Taylor | Getty Images

British consumer price inflation unexpectedly held steady last month as fuel prices fell amid other signs that the squeeze on households' spending power may slowly be starting to level off.

Official figures on Tuesday showed the pace at which manufacturers' raw material costs are rising slowed by the most in over five years as the initial impact of June 2016's vote to leave the European Union dropped out of annual comparisons.

Consumer price inflation held unchanged at 2.6 percent in July compared with the average expectation in a Reuters poll of economists for it to rise to 2.7 percent, the Office for National Statistics said.

"Falling fuel prices, offset by (rises in) the costs of food, clothing and household goods, left the headline rate of inflation unchanged in July," ONS statistician James Tucker said.

Further price rises may still be in train, as the Bank of England predicted at the start of the month that inflation will reach around 3 percent in October, after earlier touching a four-year high of 2.9 percent in May.

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Britain's biggest energy supplier, British Gas has said it plans to increase electricity prices by 12.5 percent in September. And most rail fares will rise next year by 3.6 percent, July's rate of retail price inflation - an older measure that the ONS says is no longer reliable, but which is widely used in British commercial contracts.

However, a softer outlook for inflation will reduce the chance of more BoE policymakers joining the minority who are calling for a rate rise now. There was some good news for manufacturers, who saw the inflation rate for raw materials drop to 6.5 percent from 10.0 percent, its lowest rate in a year and the sharpest month-to-month fall in that rate since April 2012.

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Rising inflation has squeezed household incomes this year, causing spending and broader economic growth to slow, as wages have failed to keep pace with the rising cost of living.

Sterling has fallen 14 percent since the referendum against a trade-weighted basket of major currencies such as the U.S. dollar and the euro and the BoE has said this is why inflation is above its 2 percent target.

An ONS measure of core consumer price inflation - which strips out changes in the price of energy, food, alcohol and tobacco - held steady at 2.4 percent compared with economists' expectations for it to rise to 2.5 percent.

Factory gate price inflation slowed slightly less than expected, dropping to 3.2 percent compared with forecasts of 3.1 percent.

The BoE expects CPI will only fall slowly, and to remain above its 2 percent target for the next three years, based on its experience of a previous fall in sterling 10 years ago at the start of the financial crisis.

The ONS also released figures for house prices in June, which showed a 4.9 percent annual rise across the United Kingdom as a whole compared with 5.0 percent in May, the weakest increase since March. Prices in London alone grew by 2.9 percent.