Daily Management Review

Headline Inflation In The UK Falls Significantly In July To 6.8% As Had Been Predicted


Headline Inflation In The UK Falls Significantly In July To 6.8% As Had Been Predicted
The headline inflation rate in the United Kingdom fell significantly in July to an annual 6.8%, but the core CPI stayed steady, potentially giving the Bank of England a headache.
The headline CPI result, which came after June's lower-than-expected 7.9% reading, was in line with the consensus forecast among analysts surveyed by Reuters. In contrast to the consensus prediction of -0.5%, the headline CPI dropped by 0.4% on a monthly basis.
Core inflation, which does not include volatile energy, food, alcoholic beverage, and tobacco prices, remained at 6.9%, unchanged from June, and marginally higher than the consensus estimate of 6.8%.
“Falling gas and electricity prices provided the largest downward contributions to the monthly change in CPIH and CPI annual rates; food prices rose in July 2023 but by less than in July 2022, also leading to an easing in the annual inflation rates,” the Office for National Statistics said.
“Hotels and passenger transport by air were the classes that provided the largest offsetting upward contributions to the change in the rate.”
Although homes and families across will be relieved by the figures, Gareth Davies, exchequer secretary at the U.K. Treasury, told CNBC on Wednesday that the government and the central bank were "not out of the woods" in their attempts to control inflation.
“The plan that we are executing on is clearly working, but we need to keep with that plan, keep making responsible decisions when it comes to public finances, and we need to make sure that fiscal policy is aligned with monetary policy at the Bank of England,” Davies told CNBC’s “Squawk Box Europe.”
The main interest rate was raised by a quarter percentage point to 5.25%, a 15-year high, during the Bank of England's monetary policy meeting earlier this month. This was the key rate's 14th consecutive increase.
The Monetary Policy Committee, which promised to "ensure that Bank Rate is sufficiently restrictive for sufficiently long to return inflation to the 2% target," made little hint that the period of high interest rates was going to come to an end soon.
Central bankers have been closely monitoring both inflation and the U.K.'s tight labour market, which statistics on Tuesday suggested may be starting to relax.
In June, the jobless rate increased to 4.2%, exceeding predictions and reaching its highest level since October 2021.
Analysts observed that while the employment rate decreased, the participation rate mostly remained stable, indicating a reduction in labour demand.
According to the Office for National Statistics, earnings excluding bonuses climbed by 7.8% year over year in the three months to June, the strongest growth rate since records began in 2001. Pay growth is nevertheless a problem for policymakers. This was still less than inflation, which in June was 7.9%, though.
The decrease in headline inflation, according to UK Finance Minister Jeremy Hunt, demonstrated that the government's efforts to combat inflation are "working," but added that "we're not at the finish line."a
“We must stick to our plan to halve inflation this year and get it back to the 2 per cent target as soon as possible,” Hunt added.
According to David Henry, investment manager at Quilter Cheviot, the extended cost-of-living issue in the U.K. may be showing signs of abating with headline inflation dropping to 6.8% and wages increasing at a record rate.
“Households are still under immense pressures however, and inflation isn’t going to fall dramatically, but it will be pleasing to millions to see their take home pay now seeming to keep up with inflation,” he added.
Henry pointed out that the headline figures only reveal "a fraction of the story," as consumers continue to be hit by skyrocketing food prices and core inflation that shows no sign of slowing down.
“With the surprise in earnings growth added in and the economy holding up in the face of adversity, the Bank of England will probably determine that more interest rate rises are required to get the job done,” he said.
The Institute of Chartered Accountants in England and Wales' Suren Thiru said that while the figures may give comfort that the inflation tide has turned, the July drop was more due to lower energy costs as a result of the regulator Ofgem lowering its price cap than to a more general easing of price pressures.
“It’s encouraging that pay is outpacing price growth, but any financial boost is likely to be swallowed up by higher taxes, borrowing costs and rent, so for most people this won’t feel like a turning point in the cost-of-living crisis,” Thiru said.
“While core and services inflation are proving harder to shift, they should fall back over the rest of the year as rising unemployment and tighter monetary policy help choke off demand in the economy.”
Although the Monetary Policy Committee's votes may be more equally divided than at its previous meeting, he stated that another rate increase from the Bank of England in September now seemed "inescapable" as concerns about the effects of higher rates on the British economy deepen.