The rate of inflation has fallen again. CPI rose 7.9 per cent on the year in June, down from 8.7 per cent on the year in May. This takes the headline rate back to its lowest level since March last year – although it remains the highest across major economies.
A drop in motor fuel prices was the biggest contributor to the dip in the headline rate, bringing down transport costs. We are starting to see some movement in food prices too, which continued to rise on the year to June by a painful 17.3 per cent, ‘but by less than in June 2022, also leading to an easing in the rates’.
Today’s update is being reported as a good news story – indeed the first one on inflation for some time. Is it a good news story though? While the headline rate has come in lower than market expectations (which sat at 8.2 per cent), it is still higher than the Bank of England’s most recent forecast, which expected 7.8 per cent on the year. Still, inflation now seems to be falling broadly in line with the BoE’s expectations, which remain that the rate will drop significantly by the end of the year.
Already there are whispers that Rishi Sunak’s pledge to ‘halve inflation’ may be back on track. The huge caveat, of course, is that numbers will have to keep heading in the right direction at quick pace: two things that have not consistently panned out this year.
Perhaps the best update this morning is that core inflation figures – excluding food and energy – rose 6.9 per cent on the year in June, down from 7.1 per cent in May. This rate is still stubbornly high and suggests that domestic price hikes have become baked into the system in a way that was never originally expected by most politicians or the central bank.
Moreover, there is no chance of halving inflation while the core inflation rate hovers around 7 per cent. But in previous months the core inflation rate was going in the wrong direction: rising as the headline inflation rate fell. Today’s small dip in the rate hopefully means that core inflation has peaked, though we’ll have to see what next month’s figures have in store.
Still, the UK’s inflation rate looks rather ugly compared to the United States, which rose 3 per cent on the year to June. Andrew Goodwin, Chief UK Economist at Oxford Economics, notes that the ‘two key differences between the US and UK experiences’ include the UK having to ‘endure a significant energy price shock,’ and strong wage growth causing ‘services inflation to rise, as firms passed on higher labour costs to consumers’. But Oxford Economics is expecting more movement in the UK inflation rate by the end of the year, estimating that the US headline rate will stay ‘around 3 per cent’ with the UK rate falling to ‘around 5 per cent.’
Still, the biggest question remains what a change in the headline rate means for interest rates. Expectation remains that rates will keep rising, though this latest fall might push the Monetary Policy Committee towards a 0.25 percentage point hike, rather than another 0.5 percentage point hike.
Capital Economics reports this morning that it’s good news that the UK is ‘now following the global trend’ on inflation – that is, the rate is clearly going down. Nevertheless, they say that both stronger than expected wage growth and services inflation mean that ‘there is enough evidence of “more persistent pressures” to prompt the Bank’ to keep raising rates.
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