UK inflation sees surprise fall, but further action expected from Bank of England

Wed 19 Jul 2023
Posted by: Phillip Adnett
Trade News

Inflation sign going up

The UK saw a surprise drop in inflation last month, falling to its lowest level in well over a year. Office for National Statistics (ONS) data for June shows a greater than expected fall in the annual inflation rate to 7.9%, following May’s results when it remained at 8.7%.

Economists polled by Reuters had mostly been forecasting a smaller decline in inflation, to 8.2% in the 12 months to June.

Core inflation, which strips out food and energy, also fell back to 6.9% after reaching a 30-year high of 7.1% in May.

Although now at its lowest rate since March 2022, UK inflation is still well above the Bank of England’s official 2% target and remains the highest among the G7 group of advanced economies, reports the Guardian.

James Smith, head of research at the Resolution Foundation think-tank, told Reuters: "The UK still has one of the highest inflation rates of any advanced economy, but after today it merely looks bad, rather than a basket case."

Fuel falls

Petrol and diesel prices dropping by more than a fifth were strong contributors to the fall in inflation, but food inflation remains high at 17.3%, albeit down from 18.3% in May.

The ONS report said producer price inflation, which measures the price of goods leaving the factory gate, also fell close to zero from a peak of about 25% last year, which could feed through to consumer prices in the coming months.

Despite encouraging indicators, City AM reports said the BoE is expected to lift borrowing costs from their current level of 5% to a peak of around 6.25% next year.

Bank pressure

But Yael Selfin, chief economist at KPMG UK, told the BBC that while inflation was likely to continue falling, it would not return to the BoE 2% target before early 2025, so the BoE would probably maintain its current policy.

However, the BoE is likely to greet the latest news with relief, with expectations being that the base rate of interest will rise slightly less than expected.

Inflation is now expected to fall below 7% next month as drops in household energy bills also impact on the numbers.

Last week, the BoE invited the Institute of Export & International Trade (IOE&IT) and several IOE&IT members to a round-table discussion on inflation policy.