In July, the annual inflation rate in the UK saw a significant drop to 6.8%, though the core consumer price index showed no change. The situation could pose challenges for the Bank of England.
The recorded headline CPI value aligns with the predictions made by economists surveyed. That follows the previous month of June when inflation was unexpectedly lower at 7.9%. From a monthly perspective, the headline CPI experienced a 0.4% decrease, slightly better than the projected -0.5% decline.
UK inflation still high
According to the Office for National Statistics, the decrease in gas and electricity prices played a major role in driving down the monthly change in the Consumer Prices Index, including owner occupiers’ housing costs (CPIH) and the annual CPI rates. While food prices did increase in July 2023, the increase was smaller compared to July 2022, contributing to a reduction in the annual inflation rates. Conversely, the hotels and air passenger transport sectors contributed the most to counteract the downward trend in the rate change.
In the recent monetary policy meeting of the Bank of England, there was a split decision to raise the main interest rate by a quarter of a percentage point, reaching a 15-year peak of 5.25%. That marked the 14th consecutive increase in the key rate. The Monetary Policy Committee suggested that elevated interest rates would persist substantially to ensure inflation returns to the targeted 2%.
Beyond monitoring inflation, central bankers have closely observed the UK’s labor market. Recent data indicates the potential beginning of a shift. The unemployment rate rose unexpectedly to 4.2% in June, surpassing predictions and reaching its highest since October 2021. Although the participation rate remained relatively stable, the employment rate dipped, suggesting a decline in labor demand.
Policymakers face challenges concerning wage growth, as wages excluding bonuses recorded a remarkable year-on-year growth of 7.8% in the three months ending June. The highest growth rate since records began in 2001 still falls behind the inflation rate of 7.9% in June.
Jeremy Hunt, the Finance Minister of the United Kingdom, commented on the decrease in headline inflation, stating that it signifies the effectiveness of the government’s efforts in addressing inflation. However, he stressed that despite the progress, they haven’t yet achieved the ultimate goal.
Hunt highlighted the importance of adhering to the established strategy to reduce inflation by half this year and swiftly return it to the targeted 2% mark. He reiterated the commitment to continue working towards this objective.
The ongoing cost-of-living crisis is still far from over
The prolonged cost-of-living crisis in the UK might be showing signs of improvement, as headline inflation dropped to 6.8%. At the same time, wages experienced a notable increase, according to David Henry, an investment manager at Quilter Cheviot. Despite these positive indicators, households are still facing significant pressures, and it’s expected that the reduction in inflation might be gradual. While take-home pay appears to keep up with inflation, consumers still grapple with high food prices, and core inflation remains largely unchanged.
Although the headline numbers offer some relief, Suren Thiru, economics director at the Institute of Chartered Accountants in England and Wales, noted that the decrease in July could be attributed to lower energy bills resulting from Ofgem’s reduction in its price cap rather than a broader easing of price pressures. Thiru expressed cautious optimism about the growth of pay outpacing price growth. Still, he pointed out that increased taxes, borrowing costs, and rent might offset this financial relief, limiting the positive impact on people’s lives.
Thiru also anticipated that core and services inflation, which has been more resistant to change, could decrease in the coming months due to rising unemployment and tighter monetary policies leading to reduced economic demand. As a result, he suggested that another interest rate increase from the Bank of England in September is likely. However, Thiru added that concerns are growing about the potential negative effects of higher rates on the British economy, potentially leading to a more evenly split vote within the Monetary Policy Committee.
