UK inflation falls to 7.9% in June, below expectations

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

Economists polled by Reuters had forecast an annual rise in the headline consumer price index of 8.2 percent, after corn’s warmer-than-expected 8.7 percent, but annual price increases continue to run well above the Bank of England’s target of 2 percent.

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

Falling motor fuel prices made the biggest 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 less than in the same period last year.

“There were no major offsetting contributions to the change in rate,” the ONS added.

Sterling fell 0.6% against the dollar on Wednesday, hovering around $1.296 at 07:50 London time.

Treasury 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 in the 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%.”

Britain has endured persistently high inflation that both the government and the Bank of England have warned could become entrenched in the economy, as a cost-of-living crisis and a tight labor market push up wages.

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 pay settlements were hurting their efforts to contain inflation.

The Organization for Economic Co-operation and Development estimated last month that Britain will experience the highest level of inflation of all advanced economies this year, with an overall annual rate of 6.9%.

The Bank of England carried out a shock rate hike of 50 basis points last month, its 13th increase in a row, as the monetary policy committee struggles to stem demand and rein in inflation.

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

A “flash of light”

Although energy and fuel prices are taking headline inflation in the “right direction”, stubbornly high core inflation and food costs mean Wednesday’s pressure is unlikely to bring any “real relief to struggling households and businesses”, said Suren Thiru, chief economist at the institute. of Chartered Accountants in England and Wales.

“June’s decline in inflation should be followed by a sharp fall in July, with lower energy bills – following the reduction in Ofgem’s energy price cap – likely to pull the headline figure below 7%,” Thiru said in a statement.

He added that core inflation should continue to trend downward, as the lagged effects of the Bank of England’s monetary tightening and the government’s tax hikes squeeze demand. He nevertheless warned that this will come “at the expense of a significantly weaker economy and higher unemployment”.

“While rates are likely to rise again in August, focusing too much on current inflation data to set rates could lead to harmful policy mistakes given the long time lag between rate hikes and their effect on the broader economy,” Thiru said.

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

“Demand has resisted both inflation and the rise in interest rates, but cracks are appearing and as more mortgage holders are exposed to current interest rates, the economy is likely to be hit as a result.”

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

“Inflation should soon start to return to more palatable levels, but as we have seen, these forecasts are unpredictable,” 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 gold, as these look attractively priced right now as we enter a potentially difficult economic period.”