Economists expect another month of stable inflation before sterling’s Brexit devaluation hits prices
Inflation figures out this week are expected to reveal sterling's dramatic post-referendum collapse is yet to hit prices for UK consumers.
Statistics out on Tuesday, which will show how quickly prices rose in July, the first full month after the referendum, will also be watched closely by commuters as they determine how much train tickets will go up by at the beginning of next year.
Although it is unlikely to be interpreted as good news, especially for travellers on the chaotic Southern mainline, analysts expect the rate of inflation to have held steady in July.
The consumer prices index (CPI) is set to come in at 0.5 per cent, unchanged from the month of June. The retail prices index (RPI) – the measure of inflation used to set train fares – will probably nudge up from 1.6 per cent to 1.7 per cent according to consensus estimates.
The train operating companies are only allowed to increase the cost of regulated fares, such as season tickets, in January by a figure determined by the rate of RPI inflation in the preceding July.
Earlier this year fares went up by just one per cent, their smallest annual increase in five years.
In recent years the fare hikes have been limited to RPI, although between 2004 and 2013 the annual increase was capped at RPI plus one percentage point.
Despite inflation holding steady in July, economists expect the pace of price rises to pick up over the rest of the year and into 2017. "While the feed-through of a weaker pound will soon start to put upward pressure on core inflation, the July data have been collected too soon for this to be a major factor," said Capital Economics.
The consultancy continued: "Inflation should start to climb this year, as sterling's slide since the referendum pushes important prices up and as the effect of low energy and food inflation wanes."
Sterling fell to a 31-year low against the US dollar shortly after the vote and has failed to recover. Meanwhile it has drifted gradually downwards against the euro and currently stands at €1.1572. On a trade-weighted basis the currency is down 15 per cent since the start of the year, meaning the average cost of imports is 15 per cent higher.
The Bank of England, which is mandated to keep inflation at around two per cent over the medium and long-term expects CPI inflation, which is typically lower than RPI when house prices are increasing because of their different compositions, to rise to 1.9 per cent next year and reach 2.4 per cent in 2018 and 2019.