The UK’s Inflation Cools in July, but Concerns Remain for the Bank of England

The UK’s Inflation Cools in July, but Concerns Remain for the Bank of England

The headline inflation in the UK experienced a notable cooling in July, dropping to an annual rate of 6.8%. This figure aligns with the consensus forecast of economists polled by Reuters and follows the lower-than-expected rate of 7.9% in June. However, while the headline CPI showed a decrease of 0.4% on a monthly basis, in line with the consensus forecast, the core inflation remained unchanged at 6.9%. This poses a potential challenge for the Bank of England, as the core inflation, which excludes volatile energy, food, alcohol, and tobacco prices, slightly exceeded the consensus forecast of 6.8%.

The Office for National Statistics attributed the largest downward contributions to the monthly change in the CPIH and CPI annual rates to falling gas and electricity prices. The easing in the annual inflation rates was also influenced by a rise in food prices, albeit at a slower pace compared to July 2022. On the other hand, the classes of hotels and passenger transport by air provided the largest offsetting upward contributions to the rate change.

Gareth Davies, the exchequer secretary at the UK Treasury, expressed his relief over the inflation data, highlighting its positive impact on households and families across the country. However, he cautioned that the government and the central bank still face challenges in managing inflation. Davies emphasized the need to continue executing the current plan, making responsible decisions regarding public finances, and ensuring alignment between fiscal and monetary policies at the Bank of England.

During its most recent monetary policy meeting, the Bank of England’s Monetary Policy Committee voted to raise the main interest rate by a quarter percentage point, reaching a 15-year high of 5.25%. This marked the 14th consecutive increase to the key rate. The committee indicated that high interest rates were likely to continue for an extended period to bring inflation back to its 2% target. Alongside inflation, the Bank of England has been closely monitoring the UK’s labor market, which showed signs of weakening with a rise in the unemployment rate to 4.2% in June, surpassing expectations.

One of the challenges faced by policymakers is pay growth. Wages, excluding bonuses, grew by 7.8% year-on-year in the three months leading up to June, the highest growth rate since records began in 2001. However, this growth still remains below the inflation rate of 7.9% in June. The drop in headline inflation and the record pace of wage growth suggest that the UK’s cost-of-living crisis may be showing signs of abating. Nevertheless, David Henry, an investment manager at Quilter Cheviot, emphasized that the headline figures only reveal a fraction of the story. Consumers continue to face soaring food prices, and core inflation remains stubbornly high.

David Henry predicted that, considering the surprise in earnings growth and the economy’s resilience, the Bank of England will likely conclude that additional interest rate rises are necessary to address these issues. Suren Thiru, the economics director at the Institute of Chartered Accountants in England and Wales, also suggested that another rate rise in September is probable. He noted that while the drop in July’s inflation figures may provide some reassurance, it is largely attributed to lower energy bills following Ofgem’s price cap reduction rather than a more general easing of price pressures. Thiru added that despite pay outpacing price growth, most individuals will not feel a turning point in the cost-of-living crisis, as higher taxes, borrowing costs, and rent are likely to offset any financial boosts. He predicted that core and services inflation may decrease in the remaining months of the year due to rising unemployment and tighter monetary policy’s impact on reducing demand in the economy.

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