Inflation fell to 2% in July as coronavirus restrictions eased thanks to summer sales – how it affects your finances

THE rate of inflation in the UK dropped to 2% in July across a range of goods including clothes, which fell in price during summer sales.

The latest figures from the Office for National Statistics show prices are rising at a slower rate then the previous month.

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Inflation in June was at 2.5% according to the consumer price index (CPI), not including housing costs, and in May was 2.1%.

The Bank of England warned recently that inflation could reach as high as 4% towards the end of the year when energy prices are expected to rise.

The price of clothes and shoes fell in July which is summer sale season, though less so than in previous years the ONS said.

However, the lifting of lockdown restrictions has seen transport costs rise for Brits.

The data shows theses costs went up by 0.85 percentage points, the largest upward contribution of any sector since 2011 and largely driven by rising fuel prices.

Summer sale prices offset the rising costs of fuel, which was 132.6 pence per litre in July compared to 111.4 pence per litre in the same month last year.

The retail price index, a different measure of inflation, was 3.8% in July.

The RPI for July is usually used to dictate rail ticket price rises the next year.

What does it mean for your finances?

Inflation is a measure of the cost of living. It looks at how much the price of goods have changed over time.

The average increase in prices is usually based on how much things cost today compared to a year ago and is known as the inflation rate.

So if the rate of inflation is 2% it means that prices are generally 2% higher than they were this time last year.

The higher the rate of inflation the more prices are rising.

A higher rate of inflation means you have to spend more, but how much you earn may not be rising at the same rate and that could leave you with less in your pocket overall.

It also means that if inflation is higher than the interest you’re earning on your savings, you lose spending power

A saver with £1,000 stashed away in an easy-access cash account that pays an interest rate of 0.6% for instance, would make just £6.

But inflation means that £1,000 today would be worth 2% less in a year’s time – or £20.

Lower inflation, on the other hand, means prices are rising more slowly and that your savings won’t lose spending power, or as much if inflation is higher.

But people may be put off buying things if they think prices will go down and businesses won’t make as much profit if prices fall and that can have a knock on effect on jobs.

The government sets an inflation target of 2% to keep the economy growing steadily.

This post first appeared on thesun.co.uk