Inflation fell back down to the Bank of England’s 2% target in July, in an unexpectedly sharp slowdown, which some economists said was most likely a blip as the reopening of the economy after lockdown should keep driving prices higher.

Sterling showed little reaction to the figures as investors judged they were unlikely to alter the rising trend for inflation and would not sway Bank of England (BoE) policymakers much. Earlier in August, the BoE said it expected to tighten monetary policy moderately over the next three years and that it expected inflation to jump to 4.0% by the end of this year, which would be a decade high.

July’s slowdown in inflation reflected a jump in prices in the same month last year when Britain’s economy was emerging from its first coronavirus lockdown.

Market opinion
Commenting on the UK CPI inflation coming in at 2%, Olivier Konzeoue, FX sales trader at Saxo Markets, said: “CPI rose by 2% in the 12 months to July 2021, down from 2.5% in June and below the 2.3% expected. This is the first time UK inflation has fallen back to 2% since April and the first time in a while that UK CPI doesn’t match economists’ consensus. This drop can be partly explained by the sharp rise in prices observed in July 2020 as lockdown restrictions were eased more broadly.”