LONDON (AP) — Inflation across the U.K. was unchanged in the year to June, an unexpectedly low outcome that pushed the pound sharply lower Wednesday as traders wondered whether the Bank of England will opt against raising interest rates again next month.
The Office for National Statistics said the annual inflation rate held steady at 2.4 percent in June, against expectations of a rise to 2.6 percent. The agency said lower prices for clothing, games and toys provided the largest drag and helped offset rises in energy and motor fuel.
Though inflation remains above the Bank of England's target of 2 percent, there are now questions as to whether the bank's nine-member Monetary Policy Committee will back another rate rise on Aug. 2. A quarter-point increase in the benchmark rate to 0.75 percent had been widely expected after improved economic data for the second quarter and positive comments from policymakers, including bank Governor Mark Carney.
The inflation figures suggest it may not be a done deal, not least because of the growing uncertainty surrounding the Brexit process as evidenced by a series of close votes in Parliament. Prime Minister Theresa May is struggling to cobble together a majority on its plan for Britain to leave the European Union.
Following the data, the pound was down 0.6 percent at $1.3037 and near 10-month lows.
"June's inflation data leave the MPC's meeting in August very finely balanced," said Samuel Tombs, chief U.K. economist at Pantheon Macroeconomics.
"We think the Committee still will press ahead and raise rates next month, given the rebound in the activity data but the probability likely is lower than the 75-percent chance currently priced in by investors."
One of the main reasons policymakers have argued in favor of raising interest rates soon is that household incomes are rising again at a time of low unemployment — and that has the potential to push prices higher. Household incomes had been depressed for much of the time since the Brexit vote in June 2016. The decision prompted a sharp fall in the pound and cause prices to rise faster than wages, meaning households effectively became poorer.
Wednesday's inflation reading means that incomes are still growing faster than prices and that may be enough for rate-setters to back a hike. Figures released Tuesday showed wage growth at 2.7 percent.
"Somewhat counterintuitively, lower inflation might make it easier for the MPC to raise rates as it will relieve the pressure on consumers' incomes," said Ruth Gregory, senior U.K. economist at Capital Economics.
"Overall, then, we still think a rate hike in August is more likely than not."