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UK consumer prices rose 7.9% year-on-year in June, the lowest inflation rate in more than a year, the Office for National Statistics said Wednesday.
A bigger-than-expected economic slowdown should bring some relief to the government after months of repeated higher-than-expected inflation. The annual rate of increase slowed from 8.7% in May. A significant drop in motor fuel prices contributed to the decline.
Food prices in June rose 17.3% from a year earlier. While still high, food inflation has eased from its April peak of 19%. The easing of price increases here also helped keep overall inflation down.
Core inflation, which excludes food and energy prices, stood at 6.9% in June, down from 7.1% the previous month.
Why it matters: Inflation remains high.
Headline inflation has fallen, but policymakers are closely monitoring other indicators of price pressures that show how deeply entrenched inflation is in the UK economy. Rising prices in the service sector and accelerating wage growth are signs of persistent inflation and one of the reasons the central bank has raised interest rates to their highest level since 2008.
Some of these price pressures eased in June. Service sector inflation eased slightly to 7.2%, while core inflation fell for the first time since January.
Oxford Economics economist Andrew Goodwin said Wednesday’s data were “a rare and welcome downside surprise”. But he cautioned that volatile price categories, such as furniture prices, are part of the reason for the slowdown.
“I don’t think this release will be a game changer,” Goodwin added. “Basically, wage growth and service inflation are too high.”
High prices have weighed on household budgets for a year and a half. In January, the government promised to halve inflation to 5.2% by the end of the year.
Inflation is expected to slow significantly in the second half of the year, as the impact of last year’s high energy prices no longer affects annual calculations and consumers begin to feel the benefits of lower production costs for manufacturers.
However, the pace of this slowdown is creating new sources of uncertainty. Inflation data has been surprisingly high in recent months, prompting the Bank of England to step up warnings that inflation is stronger than officials expected.
Background: Inflationary pressures are rising due to a tight labor market.
Fulfilling the government’s promises will not solve Britain’s inflation problem. The central bank has a mandate to ensure price stability, measured as 2% inflation.
Inflation in the UK, like its neighbours, was pushed up by higher energy prices last year. But as wholesale prices fell this year, the benefits have been slow to reach British households, in part because energy price caps have been set quarterly by government regulators.
While this partly explains the UK’s relatively high inflation rate (higher than Western Europe and twice that of the US), there are other reasons for strong inflationary pressures in the UK.
There are still more unemployed people in the UK than before the pandemic, with a lower unemployment rate and more job openings. Employers are raising wages to attract and retain workers. Even though most of these wage increases have not kept up with inflation, there is a risk that wage increases will become a staunch driver of inflation as firms pass on higher labor costs.
Private sector salaries rose 7.1% year-on-year in the three months to May, a record high except for the pandemic, where furloughs skewed the data.
What’s next: The central bank is expected to hike rates.
The Bank of England raised interest rates for the 13th time last month, from 0.1% at the end of 2021 to 5%. But investors expect interest rates to rise further when policymakers meet again in early August.
“Inflation is unacceptably high,” Bank Governor Andrew Bailey said last week. He added that the current pace of price and wage growth is not consistent with meeting the central bank’s 2% inflation target.
Bailey and the government say the pain of rising interest rates is less than the pain of sustained high inflation, but every time interest rates rise, there is more to mortgage holders who need to renew the terms of their fixed-rate loans. be a blow. .
Many mortgage rates will rise from less than 2% to over 6%. The Bank of England estimates that about 3 million mortgage holders will experience an increase in repayments of up to £500 a month by the end of this year.
