Inflation falls to 16-month low with hopes of ‘dramatic’ price drops on the way

Szu Ping ChanWed, July 19, 2023, 3:14 AM EDT

Shoppers walk along Oxford Street in London
Shoppers walk along Oxford Street in London

Inflation slowed at a faster-than-expected pace in June, amid a big fall in petrol prices and a slowdown in rising food costs.

Prices, as measured by the consumer prices index (CPI), rose by 7.9pc in the year to June, according to the Office for National Statistics (ONS).

This was down from 8.7pc in May and represents the lowest rate since March 2022, when prices were rising in the immediate aftermath of Russia’s invasion of Ukraine.

Economists had expected a less marked drop in the headline rate to 8.2pc. June’s surprise was the first lower-than-expected reading in months and came as underlying inflation also eased.

The fall in inflation was driven by a big drop in petrol and diesel costs, which are more than 20pc cheaper than a year ago when the Russian invasion triggered a massive spike in fuel and energy costs.

Food price inflation also eased, although prices are still 17.3pc higher than a year ago.

Core inflation, which strips out volatile price changes in food and energy, also eased to 6.9pc, which was below expectations that the rate would remain unchanged at 7.1pc.

Grant Fitzner, the ONS’s chief economist, said the more marked drop in the headline rate showed the UK was “catching up with the falls we’re seeing in other similar countries”.

Inflation in Germany currently stands at 6.8pc, while June’s headline rate eased to 5.3pc in France.

Mr Fitzner partly blamed the UK’s energy price cap for keeping inflation high relative to other countries.

He told the BBC: “If you look specifically at energy prices… in most other countries when energy prices change, electricity and gas prices paid by consumers change.

“In the UK, they used to adjust every six months and now every quarter and that builds a lag into those price adjustments, which means it can often take a month or two longer for changes in market energy prices to flow through to consumers.”

Mr Fitzner suggested that changes to the July price cap would help to drive the headline inflation rate even lower.

He added that more relief for consumers was on the way in shop prices, with the ONS seeing “very big falls” in raw materials costs and factory gate prices.

Prices paid by businesses for materials fell 2.7pc in the year to June, down from a peak of 24.5pc in what Mr Fitzner described as “really dramatic falls”, while factory prices were “virtually flat,” Mr Fitzner said.

He added: “Typically producer prices lead consumer prices by three to four months. So certainly if you look at the pipeline, that looks encouraging.”

The data eases pressure on the Bank of England to keep interest rates higher for longer.

June’s inflation figure was in line with the Bank’s forecasts of a steep drop in inflation, although the rate remains well above its 2pc target.

The pound plunged as much as 0.7pc to below $1.30 after the inflation number was published as traders pared back bets on rate rises.

While the bigger-than-expected fall is likely to feed through to mortgage rates in the coming weeks, economists said it may not be enough to prompt a pause in interest rate rises.

Officials have lifted rates 13 times since December 2021 to 5pc. While many analysts are now ruling out another half a percent hike in August to tame inflation, traders still expect the base rate to peak at around 5.75pc.

Yael Selfin, chief economist at KPMG, said the Bank “is unlikely to substantially change its hawkish policy stance as inflation continues to run significantly above target”.

She noted that even in the Bank’s predictions inflation was not expected to ease back to its 2pc target until 2025.

Ms Selfin said: “We expect inflation to average 7.5pc this year before falling to 3pc in 2024.”

Mr Fitzner said: “[Inflation is] falling as we’ve seen in other countries, but it still looks like we may have the highest rate of inflation in the group of seven countries. So still some way to go.”

Jeremy Hunt suggested that there would be no room for tax cuts until inflation has been vanquished.

While the Chancellor welcomed the inflation drop, he said: “We aren’t complacent and know that high prices are still a huge worry for families and businesses. The best and only way we can ease this pressure and get our economy growing again is by sticking to the plan to halve inflation this year.”

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