February 23, 2024

The UK inflation rate slipped to 7.9% in June, below expectations

A skyline view of the financial district of the City of London.

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LONDON – UK inflation improved significantly in June, coming in below consensus expectations at 7.9% year-on-year.

Economists had forecast an annual rise of 8.2% in the main consumer price index, after a warmer-than-expected 8.7% reading in May, but annualized price rises continue to run well above target 2% Bank of England.

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

Falling prices for motor fuel made the biggest downward contribution to the monthly change in the annual CPI 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 offset contributions to the rate change,” the ONS said.

Sterling slipped 0.6% against the dollar on Wednesday, hovering around $1.296 as of 7:50 London time.

Treasury Chief 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 said. “We are working closely with the Bank of England as we look to halve it this year and bring it down to the long-term norm of 2%.”

The UK has persistently high inflation which the government and the Bank of England have warned could weigh on the economy, as the cost of living crisis and rising wage prices fuel a tight labor market.

Bank of England Governor Andrew Bailey and UK Finance Minister Jeremy Hunt told an audience in the City of London earlier this month that high wage settlements were hurting their efforts to keep inflation at bay.

The Organization for Economic Co-operation and Development estimated last month that the UK will have the highest level of inflation of all advanced economies this year, with a headline annual rate of 6.9%.

The Bank of England last month implemented a bumper 50-basis rise in interest rates, the 13th increase in a row, as the Monetary Policy Committee struggles to dampen demand and curb inflation.

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

‘View of light’

While energy and fuel prices are taking headline inflation in the “right direction,” stubbornly high core inflation and food costs mean Wednesday’s print is unlikely to offer any “real relief to struggling families and businesses,” he said. Suren Thiru, director of economics at the Institute. Chartered Accountants in England and Wales.

“July should see a sharp decline following the decline in inflation in June, and lower energy bills – following a reduction in Ofgem’s energy price cap – are likely to pull the headline rate below 7%,” Thiru said in a statement.

He also said that core inflation should continue to trend downward, as the effects of the weakening Bank of England monetary policy and the government’s tax increases weigh on demand. He warned however that this “will come at the cost of a much weaker economy and higher unemployment.”

“While interest 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 lag between rate hikes and their effect on the economy in general,” said Thiru.

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

“Demand has held up against inflation and rising rates, but cracks are showing, and as more mortgage holders are exposed to current rates, the economy is likely to take a hit .”

Brookes noted that this route to a likely recession next year may be necessary to get inflation back to target, with the Bank of England raising rates further and fiscal tightening expected, with the government giving face an election in 2024.

“Inflation should start to return to more palatable levels soon, but as we have seen these forecasts are unpredictable,” he said.

“For investors, this means seeking refuge in quality companies that can weather this difficult environment, while also considering UK fixed income investments, such as gilts, as these look at prices attractive at the moment as we approach a potentially difficult economic period.”

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