Inflation bolt from the blue no reason to hang out bunting

Borrowers shouldn’t become complacent following today’s shock announcement of a sharp drop in inflation.

The Consumer Prices Index may have fallen to 1.9% in July — below the Bank’s 2% target for the first time in well over a year — but there’s every chance this is merely a temporary trough, not the beginning of a new trend.

Falling utility bills and fuel prices, a price war between the big supermarkets, massive price reductions in furniture and furnishings and an early start to this year’s summer sales all played a role in the drop. However, higher potential food prices on the back of the crop devastation caused by the bad weather and flooding, along with upwardly creeping oil prices could well send inflation north again in the months ahead.

Andrew Montlake, Partner, independent mortgage broker Cobalt Capital, commented: “Today’s announcement that July inflation fell to 1.9% was a real bolt from the blue, although borrowers shouldn’t hang out the bunting quite yet. Yes, this will add further weight to the case for a hold on rates in the next meeting of the MPC — especially with the downward pressure being exerted by the ongoing chaos in the debt and equity markets — but it has to be looked at in context. The sharp fall was primarily caused by short-term factors and there’s every chance inflation will snap back above 2% in the months ahead. When the MPC voted to keep rates on hold earlier this month, we urged borrowers to be vigilant. With the financial environment continuing to be so volatile, our position remains the same.”