LONDON — The headline inflation in the UK experienced a significant decrease in July, dropping to an annual rate of 6.8%. However, the core consumer price index remained unchanged, which could pose challenges for the Bank of England.
The headline CPI reading aligns with the forecast from economists polled by Reuters and follows the lower-than-expected figure of 7.9% in June. On a monthly basis, the headline CPI decreased by 0.4%, slightly better than the forecasted -0.5%.
Meanwhile, core inflation, which excludes volatile energy, food, alcohol, and tobacco prices, remained at 6.9%, the same as in June and slightly above the consensus forecast of 6.8%.
The Office for National Statistics explained that falling gas and electricity prices had the most significant impact on the decrease in CPIH and CPI annual rates, while food prices increased in July 2023 but at a slower rate compared to July 2022, contributing to a easing of the annual inflation rates. Hotels and passenger transport by air were the categories that had the largest offsetting upward contributions to the change in the rate.
Earlier this month, the Bank of England’s monetary policy meeting resulted in a split vote to increase the main interest rate by a quarter percentage point to 5.25%, the highest in 15 years. This marked the 14th consecutive increase to the key rate. The Monetary Policy Committee signaled that high interest rates would continue for the foreseeable future to bring inflation back to the 2% target.
In addition to inflation, central bankers have been closely monitoring the UK’s tight labor market. Recent data indicated that the market might be starting to loosen, with the unemployment rate rising to 4.2% in June, surpassing expectations and reaching the highest level since October 2021. Analysts noted that while the participation rate remained relatively stable, the employment rate declined, suggesting a weakening in labor demand.
Pay growth remains a concern for policymakers as wages excluding bonuses grew by 7.8% year-on-year in the three months leading up to June, the fastest growth rate since records began in 2001, according to the Office for National Statistics. However, this growth rate still fell short of inflation, which stood at 7.9% in June.
UK Finance Minister Jeremy Hunt acknowledged that the drop in headline inflation indicated progress in tackling inflation but emphasized the need to continue efforts to halve inflation this year and reach the 2% target as soon as possible.
David Henry, investment manager at Quilter Cheviot, suggested that while the drop in headline inflation and record wage growth may signify some relief from the ongoing cost-of-living crisis in the UK, households continue to face significant pressures, particularly due to soaring food prices, and core inflation remains stubbornly high. He anticipates that the Bank of England will likely determine that additional interest rate hikes are necessary.
Suren Thiru, economics director at the Institute of Chartered Accountants in England and Wales, acknowledged that the figures may provide reassurance that the inflation situation is improving. However, he attributed the July drop primarily to lower energy bills following the reduction in price caps by the regulator Ofgem, rather than a broader easing of price pressures. Thiru pointed out that despite encouraging wage growth, most people’s financial gains are likely to be offset by higher taxes, borrowing costs, and rent, so the cost-of-living crisis will persist.
He also noted that while core and services inflation are proving challenging to address, they are expected to fall in the rest of the year due to rising unemployment and tighter monetary policy, which will reduce demand in the economy. Thiru suggested that another rate rise from the Bank of England in September appears inevitable, although the voting within the Monetary Policy Committee may be more evenly split this time due to concerns about the impact of higher rates on the British economy.
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