UK inflation cools but core, services surprise to upside.

UK inflation cools but core, services surprise to upside.

British Inflation Slows, but Pressure in Core and Services Prices Persists

The latest data from the Office for National Statistics (ONS) reveals that British inflation slowed down in July to its lowest annual rate since February 2022. However, there are still signs of pressure in core and services prices, which the Bank of England (BoE) is keeping a close eye on. Even though falling gas and electricity prices drove the drop in inflation, the country still grapples with one of the highest rates of price growth in Western Europe, surpassed only by Iceland and Austria.

Inflation Numbers

Annual consumer price inflation cooled to 6.8% in July, down from June’s 7.9% figure, aligning with predictions made by the BoE and an ANBLE poll. This decrease signals progress in moving away from the 41-year-high of 11.1% in October, yet it remains significantly higher than the BoE’s target of 2%.

While headline inflation slowed, core inflation and services prices held their ground. Core inflation, which excludes volatile food and energy prices, remained at 6.9% in July, unchanged from the previous month. Services inflation, on the other hand, picked up slightly to 7.4% from June’s 7.2%.

Impact on Monetary Policy

The figures had a positive impact on the value of the British pound, with a slight increase against the U.S. dollar. This rise reflects the market’s belief that the BoE will continue its campaign of interest rate hikes. Financial markets are now indicating a roughly two-thirds chance that the BoE’s Bank Rate will reach 6% by February, up from the current rate of 5.25%.

Ruth Gregory, an economist at consultancy Capital Economics, emphasized the need for further action by the central bank. “With wage growth and services inflation both stronger than the Bank had expected, it seems clear that the Bank has more work to do,” she commented.

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Pressure Points and Outlook

The ONS report highlights a decrease in food price inflation, which, along with falling gas and electricity prices, played a significant role in driving down the overall inflation rate. However, the data also show that price pressure persists, especially in core and services prices.

The manufacturing sector offers some hopeful signs of easing inflation pressure. Factory gate prices fell by 0.8% in the 12 months leading up to July, marking the weakest reading since October 2020. Additionally, manufacturers’ input prices experienced their largest decline since May 2020, with a drop of 3.3%.

Implication for Wages and Consumers

The latest inflation figures hint at the likelihood of wage growth returning in real terms. Despite negative real wage growth since April of the previous year, adjusted for CPI, this data suggests a potential shift in the near future.

Speaking in response to the figures, finance minister Jeremy Hunt emphasized the importance of sticking to the plan to reduce inflation. “While price rises are slowing, we’re not at the finish line. We must stick to our plan to halve inflation this year and get it back to the 2% target as soon as possible,” he stated.

Overall, while there are positive developments in British inflation, challenges remain. The BoE will continue to monitor core inflation and services prices closely. As the country aims to reach its inflation target, key sectors such as manufacturing will play a crucial role in determining the trajectory of inflation.

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