UK inflation falls for second straight month but core inflation remains high

Wed 16 Aug 2023
Posted by: Phillip Adnett
Trade News

Rate of inflation going up

The rate of inflation in the UK fell for the second consecutive month in July and reached a 17-month low, driven by falling energy prices.

Figures released today (16 August) by the Office for National Statistics (ONS) reveal that the rate of inflation dropped last month, with the consumer price index falling to 6.8% in July 2023, down from 7.9% in June.

The ONS attributes this decline predominantly to a decrease in energy costs.

According to The Times, this is the lowest rate since before the Russian invasion of Ukraine in February 2022, which caused energy and food prices to spike and pushed inflation rates to historically high levels.

The price of food rose by 14.9% in July, down from last month’s rate of 17.4%.

However, core inflation – which strips out products that have more volatile prices such as food, alcohol and tobacco – remains high at 6.9% in July, unchanged from June.

‘Good news’

The chancellor, Jeremy Hunt, said that falling inflation showed “the decisive action we’ve taken to tackle inflation is working, and the rate now stands at its lowest level since February last year.”

Shadow chancellor Rachael Reeves said that that the inflation rate is still high, and also “higher than many other major economies”.

Professor Trevor Williams, a former chief economist at Lloyd’s Bank and co-founder of foreign exchange consultancy FX Guard, explained today’s news:

“Because prices are going up more slowly, the annual inflation rate is declining and will continue to do as the slower increases in food and energy prices are reflected in this year’s measure of consumer price inflation.

“On this basis, the slowing pace of inflation should see the annual rate decline to 5% or lower by the end of the year.”

The Bank of England (BoE) currently has a target rate of 2% by the end of 2023.

City AM reports that the BoE is still likely to implement a 15th straight interest rise, with a decision expected in September.

Currency

The pound jumped by 0.3% against the US dollar, its single biggest gain in two weeks.

However, the inflation news is likely to have a limited impact on currency markets in the longer term, says Williams.

“As the peak in interest rates in the US and UK are close, the pound could start to weaken versus the dollar.

“We could see the pound decline against the euro slightly, although this isn’t likely to be as major, as inflation across the Eurozone is already lower than in the UK.”

Niels Christensen, chief analyst at Nordea, told Reuters that he was “surprised” that the price of sterling hadn’t increased more, adding that the market was “locked between hike expectations supporting sterling and fear of a weaker economy weighing on sterling.”