UK headline inflation fell sharply to 6.8% in July, in line with expectations

In August, the Bank of England raised interest rates for the 14th consecutive time.

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LONDON – UK headline inflation eased sharply in July to 6.8% annually, but core consumer price index remained unchanged, posing a potential headache for the Bank of England.

The headline CPI reading was in line with consensus expectations among economists polled by Reuters, and tracking a lower-than-expected reading of 7.9% in June. On a monthly basis, the core CPI fell -0.4% against consensus forecasts of -0.5%.

However, core inflation – which excludes volatile energy, food, alcohol and tobacco prices – remained at 6.9%, unchanged from June and just above expectations of 6.8%.

“Lower gas and electricity prices made the largest downward contributions to the monthly change in the annual rates of the Consumer Health Index and the Consumer Price Index; food prices increased in July 2023 but by a lesser extent than in July 2022, which also led to lower annual rates of inflation,” Office for National Statistics He said.

“Hotels and passenger transport by air were the two categories that made the largest upward offsetting contribution to the rate change.”

The Bank of England’s monetary policy meeting earlier this month produced a fragmented vote to raise the key interest rate by a quarter of a percentage point to a 15-year high of 5.25% – the 14th consecutive increase in the key rate.

The Monetary Policy Committee gave few indications that the era of high interest rates was likely to end soon, vowing to “ensure that the bank rate is constrained enough for long enough to bring inflation back to the 2% target”.

Besides inflation, central bankers have been keeping a close eye on the tight UK labor market, which data released on Tuesday indicated could start to ease.

The unemployment rate rose to 4.2% in June, beating expectations for its highest level since October 2021. Analysts noted that the participation rate remained broadly flat, while the employment rate declined, indicating weaker demand for work.

Wage growth continues to be a headache for policymakers as wages excluding bonuses grew 7.8% year-on-year in the three months to June, the fastest rate of growth since records began in 2001, according to the Office for National Statistics. However, this remained below the rate of inflation, which stood at 7.9% in June.

Britain’s finance minister, Jeremy Hunt, said the drop in headline inflation showed the government’s measure to tackle inflation was “working”, but that “we’re not at the finish line”.

“We must stick to our plan to halve inflation this year and get it back to the 2 per cent target as soon as possible,” Hunt added.

Cost of living crisis ‘not over yet’

David Henry, chief investment officer at Quilter Cheviot, said that with headline inflation down to 6.8% and wages growing at a record pace, the UK’s protracted cost-of-living crisis could show signs of abating.

He added, “Families are still under tremendous pressure, and inflation will not drop dramatically, but millions will be pleased to see that their home paychecks now seem to keep pace with inflation.”

Henry noted that the headline numbers tell “a little part of the story,” as consumers continue to grapple with rising food prices and core inflation that meaningfully refuses to budge.

“With a surprising increase in earnings growth and the economy resilient in the face of adversity, it is likely that the Bank of England will decide that further interest rate increases are required to get the job done,” he said.

The figures may provide reassurance that the tide of inflation has turned, said Suren Theroux, director of economics at the Institute of Chartered Accountants in England and Wales, but the July drop was more due to lower energy bills after regulator Ofgem cut its price cap than to broader easing of price pressures.

“It is encouraging that wages are outpacing price growth, but any fiscal increase will likely be swallowed up by higher taxes, borrowing costs and rent, so most people will not feel this marks a turning point in the cost-of-living crisis,” Theroux said.

“While core and services inflation is proving difficult to reverse, it should ease over the rest of the year as rising unemployment and tightening monetary policy help stifle demand in the economy.”

He noted that another BoE rate hike in September now appears “inevitable”, although the Monetary Policy Committee’s votes may be more evenly divided than at its last meeting, as concerns grow about the impact of higher rates on the British economy. .