Households have been promised a long-overdue improvement in living standards after inflation eased in August, taking some of the pressure off family finances.
The consumer prices index (CPI) dipped to 2.7%, from 2.8% in July, taking it below the Bank of England’s own forecasts and putting inflation on course to hit 2% at the end of the year, economists said.
A slowing in the pace of clothing and petrol price rises, as well as air fares, kept a lid on inflation last month, the Office for National Statistics (ONS) said. Petrol prices increased just 2% between July and August to £1.37 a litre, compared with 3.5% in 2012.
Michael Saunders, UK economist at Citi, said: “We expect CPI inflation will fall further in coming months, and our base case at present is for the rate to be … 2pc in December.”
He added that the Chancellor’s recent hint at plans to reduce or cap regulated prices, such as train fares and utility bills, posed “a possible downside risk to our forecasts”.
A 25% fall in global wheat prices over the past year, in sterling terms, is expected to put more downward pressure on inflation over the next six months.
The prospect of declining inflation will come as welcome news to households, who have suffered a 7% fall in real average earnings over the past five years – making the current household squeeze the second deepest since 1860. Average wages are rising at just 1% currently, two-thirds less than prices. Labour has seized on the drop in living standards as evidence that the recovery is not being felt by most families.
“With prices still rising much faster than wages the cost of living crisis under David Cameron continues,” Cathy Jamieson, Labour’s shadow Treasury minister, said.
“Working people are worse off by almost £1,500 a year. But rather than helping ordinary families David Cameron is so out of touch he has given a huge tax cut to millionaires instead.”
A Treasury spokesman said: “Inflation has fallen, and is nearly half of its peak of 5.2%. The economy is turning a corner, but the recovery is in its early stages and risks remain. The only way to deliver a sustained improvement in living standards is to tackle the economy’s problems head on and deliver a recovery that works for all.”
Signs that inflation is falling were underpinned by the month-on-month rise in CPI. At 0.4%, it was the lowest August rise since 2009. However, the retail prices index (RPI), a separate measure that includes housing costs, rose from 3.1% to 3.3%.
Economists said the figures were unlikely to have much impact on when the Bank of England will start to raise interest rates from 0.5%, which the markets expect to be in early 2015. “We judge there to be relatively few policy implications from today’s numbers,” Philip Shaw at Investec said.
A separate release by the ONS on producer prices suggested that there is little inflationary pressure brewing. Input prices fell in August by 0.2%, and output prices rose by just 1.6%. “Falling factory gate price pressures bode well for inflation at the high street level,” Mr Shaw added.