UK inflation fell in line with market expectations in July, despite some underlying signs of stagnation, while falling energy and food prices contributed to a surprise drop in household bills .
The data offers relief for consumers but mixed messages for the Bank of England (BoE), whose cycle of aggressive hikes is finally starting to show signs of curtailing Britain’s sky-high inflation but still faces considerable hurdles from costly wages and services. .
The Consumer Price Index (CPI), a key measure of inflation, rose 6.8 percent in July from a year earlier, down from 7.9 in June, in line with market expectations, according to data. published on Wednesday by the National Statistics Office.
That headline figure will be welcome news for UK Prime Minister Rishi Sunak and his government, which pledged in January to halve inflation by the end of 2023, though that target is still some way off.
Chancellor Jeremy Hunt was quick to take credit for the turnaround.
“The decisive action we have taken to address inflation is working, and the rate is now at its lowest level since February of last year,” he posted on X, formerly the social media platform Twitter. “While the price increases are slowing, we are not at the finish line. We must stick to our plan to cut inflation in half this year and get it back to 2 percent.”
British voters will be especially pleased that the core RPI, a measure of the retail price index that excludes mortgage payments, fell to 7.9 from 9.6 percent a year earlier, down 0.4 percent from expected. News that inflation, including housing costs, is at its lowest level since March 2022 at the start of the war in Ukraine will also be welcome.
Despite the good news, and a headache for policymakers, core inflation, which excludes volatile food and energy, remained stuck in July at 6.9 percent on an annualized basis and 0.1 percent. percent above forecast, largely due to higher hotel and air travel prices caused by the summer tourism boom.
Meanwhile, the fall in consumer prices was largely due to a drop in gas and electricity costs in July, while food prices, particularly milk, cheese and eggs, also fell. at a slightly slower rate, according to the ONS.
“It’s positive that headline inflation is declining in line with market expectations, but it’s driven almost entirely by energy,” said Raoul Ruparel, director of the Center for Growth at Boston Consulting Group.
Some now fear that if energy prices continue to rise in August, that could create a growing risk of stagflation, where inflation is high and growth slows.
“That’s something that’s outside of the (central) banks’ control, it’s more exogenous, and once you put that aside, the core is where it’s at,” Ruparel said. Services have increased and we are not seeing the impacts that we expected in terms of interest rate increases that translate to the rest of the economy. The sign is that inflation is encrusting a bit.”
Exuberant summer spending on holidays and leisure is also having an impact on utility costs, and workers continue to demand higher wages and income. rising by a record amount in July.
A rise in utility costs to 7.4 from 7.2 percent is of particular concern for the Bank of England, driven largely by the biggest rent increase since 2005.
The rebound in services came as companies seeking to defend thin profit margins refused to pass the benefits of cheaper energy prices on to consumers, particularly in the hospitality sector, Jamie Dutta told POLITICO , market analyst for the broker Vantage. Although energy prices are now rising again, he added, they are still low compared to last year, which may provide momentum to lower prices in the near future.
Eager to end one of the worst inflationary bouts in Europe, the BoE has raised interest rates 14 times since December 2021, threatening a recession and putting hundreds of thousands of British homeowners at risk.
The bank has been repeatedly criticized for not moving quickly at first, then acting too aggressively when other inflation-battered countries hit the brakes, triggering the worst inflation bout among the world’s seven richest countries.
Markets still anticipate that the BoE still has a long way to go before inflation is kept in check and is pricing in another 0.75 percentage point of rate hikes (0.5 percentage point at the September meeting), which which brings the top rate to 6 percent.
“Unless we start to see a real impact from interest rates on the rest of the economy, inflation is not guaranteed to go down,” Ruparel said. “I would lean towards them taking action in the coming months.” The UK is likely to remain an “outlier”, he added, due to its exceptionally tight job market, caused in part by Brexit and the pandemic.
However, there is hope that the Bank of England’s hike cycle will soon come to an end. The bank’s Monetary Policy Committee recently softened its stance, saying in early August that its goal was to keep rates “restrictive” and minimize damage to the economy. But he also reiterated that rates would stay high to “ensure that the bank rate was restrictive enough for long enough.”