The inflation rate in Great Britain decreases to 7.9 percent

Background: A tight labor market fuels the inflationary pressure.

Achieving the government’s pledge will not solve Britain’s inflation problem. The Central Bank has a mandate to ensure price stability, which is measured as 2 per cent inflation.

Like its neighbors in Europe, inflation in the UK was pushed up by high energy prices last year. But as wholesale prices have fallen this year, the benefit has been slow to reach UK households, partly because energy price caps are set quarterly by a government regulator.

This partly explains the UK’s relatively high inflation rate – which is higher than in Western Europe and double the rate in the US – but there are other reasons why inflationary pressures in the UK are strong.

The UK still has more people out of the workforce than before the pandemic, unemployment is low and vacancies are high. Employers are pushing up wages to attract and retain workers. Although most of these wage increases do not keep pace with inflation, wage growth risks becoming a persistent source of higher prices as businesses pass on higher labor costs.

Private sector wages rose 7.1 percent in the three months to May compared with a year earlier, a record high outside the pandemic when furloughs skewed the data.

What’s next: The central bank is still expected to raise interest rates.

Despite the lower-than-expected inflation reading, the Bank of England is expected to raise interest rates when policymakers meet in early August.

That’s because the “encouraging” data comes with a caveat, according to economists at Barclays. There was the limited progress in service inflation, which together with wage growth in the private sector indicates some persistent inflation. Taken together, that warrants more monetary tightening, they wrote in an analyst note.

Economists still expect the central bank to raise interest rates by half a percent next month, but said the chances of a smaller quarter-point increase have grown.

The central bank has raised interest rates at 13 meetings in a row, to 5 percent last month, from 0.1 percent in late 2021.

Investors dampened expectations for future rate hikes on Wednesday. Previously, they bet that interest rates would peak above 6 percent, but now the markets suggest that interest rates will rise to around 5.8 percent by the end of the year.

Any drop in interest rate expectations will be good news for mortgage holders, who need to renew the terms of their fixed-rate mortgages and face increases in their monthly payments of hundreds of pounds.