Inflation expected to accelerate as wage growth lags behind

Inflation is expected to have accelerated when official figures are released on Tuesday, maintaining the squeeze on cash-strapped households struggling with low wage growth. 

The Consumer Price Index (CPI) measure of inflation is forecast to hit 2.7% for July, up from 2.6% in June, according to consensus figures. 

The move would mark a bounce back in the cost of living following June's surprise slowdown, but would fall short of the near four-year high of 2.9% recorded in May. 

The update from the Office for National Statistics (ONS) will also prove crucial for commuters, as July's Retail Price Index (RPI) figure will be used to calculate rail fares. 

RPI, a separate measure of inflation which includes council tax and mortgage interest payments, is expected to grow by 3.5% in July, the same rate as June. 

Alan Clarke, head of European fixed income strategy at Scotiabank, is predicting CPI to hit 2.8%, driven in part by rising price tags on food. 

He said: "Food price falls came to a fairly abrupt end in the aftermath of the Brexit vote, particularly on the back of the sharp fall in the GBP exchange rate. 

"Indeed, food prices have risen for seven of the last eight months - with last month being the exception, showing a 0.2% month-on-month fall."

He added: "Overall, we view last month's downward adjustment in inflation as temporary and the peak in inflation is yet to be reached."

The main downward pressure on the cost of living came in June from fuel, which saw the fourth consecutive month of falling prices, dropping 1.1% month on month. 

Upward pressure on everyday prices came from food, which saw costs ease back by a smaller 0.3% in June compared with a 0.4% fall for the same month in 2016.

Andrew Goodwin, lead UK economist at Oxford Economics, said falling fuel prices will continue to weigh on the cost of living in July, keeping CPI at 2.6%.

He said: "The weekly data from Department for Energy and Climate Change suggests petrol prices fell by more than 1% in July and, with fuel costs having risen by almost 1% in the corresponding period of last year, this will put further downward pressure on inflation in July.

"However, set against this we will see upward pressure from energy prices, as EDF's late-June hikes in gas and electricity bills hit the index."

The Brexit-hit pound has caused inflation to march higher up until this point, with wage growth now lagging behind inflation.

Annual average weekly earnings grew by 1.8% over the period, and 2% when bonuses are stripped out, according to the ONS.  

The wage figures for July, which will be released on Wednesday, are expected to remain in line with June's performance.

Despite the financial pressure, consumer spending has remained robust.

However, there is evidence suggesting households have been raiding money earmarked for savings, or using their credit cards, in order to keep spending. 

The Bank of England expects inflation to peak at 3% by the autumn of this year.

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