UK inflation rate falls to 7.9% in June, below expectations

LONDON – UK inflation cooled significantly in June, coming in below consensus expectations at 7.9% yoy.

Economists polled by Reuters had projected an annualized rise in the headline consumer price index of 8.2%, following May’s higher-than-expected 8.7% reading, but annualized price increases remain well above forecast. bank of englandThe 2% target.

On a monthly basis, the headline CPI increased by 0.1%, below a consensus forecast of 0.4%. Core inflation, which excludes volatile energy, food, alcohol and tobacco prices, remained stuck at 6.9% annualized but fell from a 31-year high of 7.1% in May.

Falling motor fuel prices made the largest downward contributions to the monthly change in the CPI annual rate, the National Statistics Office said on Wednesday. Food prices increased in June, but by less than in the same period last year.

“There were no large compensatory upward contributions for the rate change,” the ONS added.

Pound sterling it fell 0.6% against the dollar on Wednesday, hovering around $1,296 as of 7:50am London time.

Treasury Chief Secretary John Glen told CNBC on Wednesday that the larger-than-expected decline in the inflation rate was “very encouraging.”

“But there is no complacency here at Treasury,” he added. “We are working closely with the Bank of England as we try to halve it this year and bring it down to its long-term norm of 2%.”

The UK has endured persistently high inflation that both the government and the bank of england have warned it could take root in the economy, such as a cost-of-living crisis and a tight job market rising fuel wage prices.

bank of england Governor Andrew Bailey and UK Chancellor of the Exchequer Jeremy Hunt told an audience in the City of London earlier this month that high wage deals were hurting their efforts to contain inflation.

He Organization for Economic Cooperation and Development last projected month that the UK will experience the highest level of inflation among all advanced economies this year, with a headline annual rate of 6.9%.

The Bank of England implemented an extraordinary 50 basis point increase in interest rates last month, its 13th successive increase, as the Monetary Policy Committee struggles to quell demand and rein in inflation.

After the UK base rate jumped from 0.1% to 5% in the last 20 months, markets are narrowly pricing in another aggressive half-point hike to 5.5% at the August MPC meeting.

A ray of light’

Although energy and fuel prices are pulling headline inflation in the “right direction”, stubbornly high underlying inflation and food costs mean Wednesday’s release is unlikely to offer “real relief for struggling households and businesses”, said Suren Thiru, director of economics at the Institute of Chartered Accountants for England and Wales.

“June’s decline in inflation should be followed by a sharp decline in July, with lower power bills, following Ofgem’s power price cap reduction, which is likely to bring the headline rate below 7%,” Thiru said in a statement.

It added that core inflation should continue its downward trend as the lagged effects of Bank of England monetary policy tightening and government tax increases dampen demand. However, he warned that this will come “at the expense of a markedly weaker economy and higher unemployment.”

“While interest rates will likely rise again in August, focusing too much on current inflation data to set rates can lead to damaging policy errors given the long time it takes between rate hikes and their effect on the broader economy,” Thiru said.

Marcus Brookes, chief investment officer at Quilter Investors, said the CPI drop represented a “ray of light” but “still leaves us wondering once again why the UK is such a drastic outlier” among major economies when it comes to inflation.

“Demand has withstood both inflation and rate increases, but cracks are appearing, and as more mortgage holders become exposed to current rates, the economy is likely to take a hit as a result.”

Brookes noted that this path to a likely recession next year may be necessary to bring inflation back to target, with the Bank of England raising rates further and fiscal tightening unlikely as the government faces elections in 2024.

“Inflation should start coming down to more acceptable levels soon, but as we have seen, these forecasts are hit or miss,” he added.

“For investors, this means seeking refuge in quality companies that can navigate this difficult environment, while also considering UK fixed income investments such as gilts, as these are attractively priced as we head into a potentially difficult economic period.”