While the easing of headline inflation is welcome news for consumers, experts are paying closer attention to the underlying trends.
The United Kingdom’s inflation rate took a step back in July, registering an annual increase of 6.8%, a considerable decline from the 7.9% recorded in June. The new UK inflation rate is the lowest level the country has seen since February 2022. On a monthly basis, the country’s Consumer Price Index (CPI) dropped by 0.4%, in line with expectations.
According to the latest data published by the Office for National Statistics (ONS) on August 16, the cooling of inflation aligns with market predictions. While the headline figure is finding some stability, underlying trends in core inflation and services inflation send mixed signals.
Gas and Electricity Prices Drive Down Inflation Rates
The reduction in headline inflation was influenced mainly by declining gas and electricity prices, which played a vital role in driving down the overall index. Additionally, easing food price inflation contributed to the broader drop in consumer prices.
Despite this moderation, it’s crucial to note that the UK still maintains one of the highest inflation rates in Western Europe, surpassed only by Iceland and Austria.
While the easing of headline inflation is welcome news for consumers, experts are paying closer attention to the underlying trends.
Core inflation, which excludes the more volatile elements of energy, food, alcohol, and tobacco, remained stubbornly high at 6.9% year-on-year in July, holding steady from the previous month. This slight upward trend in core inflation contrasts with predictions of a 6.8% reading. This steadiness indicates that certain sectors of the economy continue to experience upward price pressures.
The services sector, a vital contributor to the UK economy, saw inflation rise to 7.4% in July, up from 7.2% in June. This upward movement in service inflation raises questions about the resilience of some industries and the potential impact on consumer behavior.
Government Efforts to Curb Inflation is Working
According to CNBC, the data published by ONS prompted responses from economic experts and officials. Ruth Gregory, an economist at consultancy Capital Economics, emphasized that the UK central bank, the Bank of England (BoE), has more work to do given the unexpected strength in wage growth and services inflation.
While responding to the ONS report, Finance Minister Jeremy Hunt said falling inflation shows the government’s efforts towards the economy are “working”. He further stated that while efforts to curb price rises show results, there is still a journey ahead to reach the desired finish line.
“We must stick to our plan to halve inflation this year and get it back to the 2 percent target as soon as possible,” Hunt said.
BoE to Raise Interest Rates
The ONS data also provided an intriguing backdrop to the ongoing deliberations of the BOE. The central bank has closely monitored core inflation and service prices as indicators of potential economic trends.
The persistence of elevated core inflation hints at potential challenges in the labor market and the broader supply chain, creating a dilemma for the central bank as it seeks to balance managing inflation and supporting economic growth.
With inflation exceeding the 2% target, the BoE’s efforts to manage monetary policy have become more complex.
During a BoE monetary policy meeting earlier this month, the government decided to raise the interest rate by a quarter percentage point to 5.25%, signaling the 14th consecutive increase since the last hike in June 2022. The move shows the central bank’s commitment to addressing inflationary pressures.
The Monetary Policy Committee on the other hand believes that the increase will likely be the end of high-interest rates.
