UK inflation rate fell to a more than expected 7.9% in June

  • Economists polled by Reuters had forecast an 8.2% annual rise in the headline consumer price index, following a warmer-than-expected 8.7% reading in May.
  • Core inflation – excluding volatile energy, food, liquor and tobacco prices – stuck at 6.9% year-on-year.

Skyline view of the City of London Financial District.

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

Economists polled by Reuters had forecast an annual rise in the headline consumer price index of 8.2%, following a warmer-than-expected 8.7% reading in May.

On a monthly basis, the headline CPI increased by 0.1%., Below the consensus estimate of 0.4%. Core inflation – excluding volatile energy, food, liquor and tobacco prices – stuck at 6.9% year-on-year.

Falling prices for motor fuel made the largest downward contribution to the monthly change in the CPI annual rate, the Office for National Statistics said on Wednesday. Food prices rose in June but were lower than the same period last year.

The ONS added: “There are no upward contributions that would largely compensate for the change in the rate.”

Sterling fell 0.6% against the dollar on Wednesday to $1.296 as of 7:50 a.m. London time.

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

“But there is no complacency here in the treasury,” he added. “We are working closely with the Bank of England to try to halve it this year to its long-term norm of 2%.”

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The UK continues to endure high inflation, which both the government and the Bank of England have warned could take root in the economy, fueled by a cost-of-living crisis and rising fuel wages in a tight labor market.

Bank of England Governor Andrew Bailey and UK Chancellor of the Exchequer Jeremy Hunt told an audience in London earlier this month that higher wage settlements were harming their efforts to control inflation.

The Organization for Economic Co-operation and Development last month predicted the UK would experience the highest inflation of all advanced economies this year, with a headline annual rate of 6.9%.

The Bank of England implemented a 50-basis-point hike in interest rates last month, its 13th in a row, as the monetary policy committee struggles to curb demand and rein in inflation.

Markets are pricing in another aggressive half-point rise to 5.5% at the MPC’s August meeting, after the UK base rate went from 0.1% to 5% over the past 20 months.

A ‘Light of Light’

While energy and fuel prices are moving inflation “in the right direction”, stubbornly high core inflation and food costs Wednesday’s print is “unlikely to provide real relief to struggling households and businesses”, said Suren Thiru, the institute’s director of economics. Chartered Accountants in England and Wales.

“A big fall in July following June’s fall in inflation, coupled with lower energy bills – following Ofgem’s reduction of the energy price cap – is likely to drag the headline rate below 7%,” Mr said in a statement.

Core inflation should continue to trend downwards, he said, as the lagged effects of the Bank of England’s monetary policy and the government’s tax hikes pressure demand. However he warned that this would come “particularly at the expense of a weak economy and high unemployment”.

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“While interest rates will rise again in August, too much focus on current inflation data to set rates could damage policy mistakes due to the long lag between rate hikes and their impact on the wider economy,” Mr said.

Marcus Brooks, chief investment officer at Quilter Investors, said the fall in CPI represented “a glimmer of light” but “once again makes us wonder” why the UK is the worst of the major economies when it comes to inflation.

“Demand has withstood both inflation and rising rates, but cracks are appearing, and as mortgage holders are exposed to current rates, the economy is likely to suffer as a result.”

With the government facing an election in 2024, further increases in Bank of England rates and fiscal tightening unlikely, Brooks noted, this path to recession next year may be necessary to get inflation back to target.

“Inflation should start coming back to a more palatable level soon, but we have seen that these projections are unpredictable,” he added.

“For investors, this means seeking shelter in quality companies that can navigate this difficult environment, while also considering UK fixed income investments such as gilts, as these are now looking at attractive prices as we head into tough economic times.”

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