Annual rate back on downward path, which eases pressure on Bank of England
UK inflation fell further than expected in June to 7.9% amid a sharp fall in petrol prices, easing forecasts for how aggressively the Bank of England will raise interest rates over the coming year.
The Office for National Statistics said the annual inflation rate as measured by the consumer prices index resumed a downward path after unexpectedly sticking at 8.7% in May. The drop exceeded City forecasts for a decline to 8.2%.
Financial markets responded by betting that the Bank of England would no longer drive interest rates above 6% early next year.
Raising further hopes of relief for mortgage holders, markets also predicted that the central bank would introduce a more modest quarter-point rise in borrowing costs at its next policymaking meeting in August instead of a tougher half-point increase from the current level of 5%.
Coming in below expectations for the first time in several months, the reading was the lowest rate since March 2022 but still well above the Bank’s official 2% target. However, UK inflation still remains the highest among the G7 group of advanced economies.
The latest snapshot showed the fall in the inflation rate was driven by the price of petrol and diesel dropping by more than a fifth compared with the same month a year ago, when prices were close to a record high.
Raising hopes for an easing of pressure on households, the annual rate of increase in food and drink prices slowed in June to 17.3%, compared with 18.3% in May, helping to bring down the headline inflation rate.
Core inflation, which strips out food and energy, and is closely watched by the Bank of England, also fell back to 6.9% after reaching a 30-year high of 7.1% in May.
Prices for some goods continued to rise sharply – including a 54% jump in the price of sugar after poor harvests in Brazil and India and the worst sugar beet crop in Europe for 20 years owing to bad weather. While increases in the price of milk, cheese and eggs eased, they were still up by more than a quarter compared with a year ago.
Economists said inflation was on track to drop further in the coming months after Ofgem lowered its consumer energy price cap in July to reflect a fall in wholesale gas and electricity prices. Liquid fuels, which were not subject to a cap, fell by almost 50%.
Highlighting the potential for further declines, producer price inflation – which measures the price of goods leaving the factory gate – also fell close to zero, from a peak of about 25% last year. Economists said this could feed through to consumer prices within the coming months, if cost savings are passed on by businesses.
“The main story today is that inflation is lower than expected, fuelling a narrative that we are through the worst,” said Kitty Ussher, the chief economist at the Institute of Directors. “The Bank of England will hope that this will cause business leaders and others to lower their expectations of future inflation, which could then become self-fulfilling.”
The Bank has already raised interest rates 13 times in succession to 5%, up from a record low of 0.1% in December 2021, adding to the pressure on businesses and households amid the cost of living crisis.
Reflecting the shift in likelihood towards fewer interest rate increases, the pound fell by about a cent against the US dollar on the international currency markets on Wednesday morning, dropping to $1.29.
The chancellor, Jeremy Hunt, said: “Inflation is falling and stands at its lowest level since last March; but we aren’t complacent and know that high prices are still a huge worry for families and businesses.
“The best and only way we can ease this pressure and get our economy growing again is by sticking to the plan to halve inflation this year.”
Charities warned that the cost of living crisis was still far from over, with prices remaining significantly higher than they were two years ago, and continuing to rise at historically high rates.
Alfie Stirling, the chief economist at the Joseph Rowntree Foundation, said: “We must recognise we are still in the belly of this crisis. For the 5.7 million low-income families in this country already forced to eat less or skip meals, inflation at close to 8% and food inflation above 17% will come as precious little comfort overall.”
UK inflation remains higher than in many comparable economies, and financial markets widely expect the Bank to drive up borrowing costs further at its next policymaking meeting in August.
Inflation in the eurozone fell to 5.5% in June, with the rate below 2% in Spain. US inflation cooled to 3%, easing pressure on the US Federal Reserve to increase interest rates much further.
“Inflation has been persistently high and remains higher than our international peers. This is becoming a hallmark of Tory economic failure,” said Rachel Reeves, the shadow chancellor.
“Today’s numbers confirm what families across the country already know – that prices are still going up at staggering rates and that they’re bearing the brunt of those costs.”
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