UK inflation slows to 7.9 per cent

The Office for National Statistics said today, Wednesday, that consumer prices in Britain rose by 7.9 percent in June compared to last year, which is the slowest pace of inflation in more than a year.

The slowdown, which was larger than economists expected, will bring some relief to the government after months of inflation rising repeatedly to higher than expected. The annual rate of price growth slowed from 8.7 percent in May. This decline was driven by a significant drop in motor fuel prices.

Food prices rose 17.3 percent in June from a year earlier. While this remains high, food inflation has fallen from a peak of 19 percent in April. The easing of price increases here also helped reduce the overall rate of inflation.

Core inflation, which excludes food and energy prices, was 6.9% in June, down from 7.1% the previous month.

Core inflation rates have fallen, but policymakers are closely watching other measures of price pressure which indicate how deeply embedded inflation has become in the UK economy. The rise in prices in the services sector, and the rise in wage growth, are signs of continued inflation and are among the reasons why the central bank raised interest rates to the highest level since 2008.

In June, some of those price pressures eased: inflation in the services sector slowed slightly to 7.2 percent, and core inflation fell for the first time since January.

Andrew Goodwin, an economist at Oxford Economics, said Wednesday’s data was a “rare and welcome negative surprise”. But he cautioned that some of the reasons for the slowdown came from price categories that can be volatile, including furniture prices.

“I don’t think this release is going to be a game-changer,” Mr. Goodwin added. “Basically, wage growth and service inflation are very high.”

High prices eroded family budgets for a year and a half. In January, the government pledged to halve the inflation rate by the end of this year, which means it will drop to 5.2 percent.

Inflation is expected to slow significantly in the second half of this year, when the impact of last year’s energy price hikes will no longer affect annual accounts, and consumers begin to see the benefits of lower production costs for manufacturers.

But the pace of this slowdown has become another source of uncertainty. In recent months, inflation readings have been surprisingly high, and the Bank of England has ratcheted up its warnings that inflation is more steady than officials expected.

Fulfilling 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 percent inflation.

Like its neighbors in Europe, inflation in Britain rose due to higher energy prices last year. But with wholesale prices lower this year, the benefit has been slow to reach British households, in part because caps on energy prices are set every three months by a government regulator.

This partly explains Britain’s relatively high inflation rate – it is higher than in Western Europe and double the rate in the United States – but there are other reasons why inflationary pressures in Britain are so strong.

There are still more people outside the labor force in Britain than before the pandemic, unemployment is low and vacancies are high. Employers pay wages to attract and retain workers. Although most of these wage increases do not keep pace with inflation, wage growth risks becoming a stubborn source of price increases as firms pass on higher labor costs.

Private sector wages rose 7.1 percent in the three months through May from a year earlier, a record outside the pandemic when furlough skewed the data.

The Bank of England raised interest rates for the 13th time last month to 5 percent from 0.1 percent in late 2021. But investors expect rates to rise when policymakers meet again in early August.

“Inflation is unacceptably high,” Andrew Bailey, the bank’s governor, said last week. He added that the current pace of price and wage hikes is not in line with achieving the bank’s 2% inflation target.

The pain of high interest rates is less than the pain of persistently high inflation, Mr. Bailey and the government said, but every increase in interest rates comes as another blow to mortgage holders who need to renew the terms of their fixed-rate loans.

Many mortgage rates will jump above 6 percent, from less than 2 percent. By the end of this year, around three million mortgage holders will see up to £500 a month increase on their payments, the Bank of England estimates.