Growing concerns about persistent high UK inflation were underscored on Wednesday as key indicators of price growth monitored by the Bank of England failed to ease in July, despite a significant drop in the headline inflation rate.
The Office for National Statistics reported that the annual consumer price inflation rate decreased to 6.8% from June’s 7.9%, in line with predictions from both the central bank and a Reuters poll of economists. This move further distanced the rate from its peak of 11.1% in October.
While the decline in the headline rate was influenced by lower energy prices, it was a relief for British consumers who have been grappling with higher inflation compared to many other industrialized nations.
However, signs of persistent core inflation and consumer service prices align with warnings issued by BoE policymakers this month, indicating that the risks of prolonged high inflation were starting to materialize.
Core inflation, excluding energy and food prices, held steady at 6.9%, the same as June, surpassing Reuters poll expectations for a reading of 6.8%.
Services inflation, primarily reflecting domestically-driven inflation pressure from wages, increased to 7.4% from 7.2%, slightly higher than the BoE’s projections.
Following the release of these figures, the pound slightly strengthened against the U.S. dollar, reinforcing the expectation that the Bank of England will continue its course of interest rate hikes.
The persistence of core inflation poses challenges for Prime Minister Rishi Sunak, who had committed to halving inflation by year-end—a goal that now appears uncertain.
Heidi Karjalainen, an economist at the Institute for Fiscal Studies, a think tank, remarked, “With only four months left, it is becoming increasingly uncertain whether inflation will have decreased enough by the year’s end to achieve this target.”
AMONG HIGHEST IN WESTERN EUROPE
According to the statistics office, the primary impetus for the decline in UK inflation was the reduction in gas and electricity prices, accompanied by a moderation in food price inflation.
Despite the decrease in the headline figure, Britain continues to experience one of the highest rates of price growth in Western Europe, trailing behind only Iceland and Austria in recent inflation levels.
Ruth Gregory, an economist at consultancy Capital Economics, pointed out, “With stronger-than-anticipated wage growth and services inflation, it’s evident that the Bank [of England] has more tasks ahead.”
Recent data published on Tuesday indicated that basic wages in the UK exhibited a record increase in the three months leading up to June. This recovery in workers’ spending power could potentially intensify concerns for the Bank of England.
On Wednesday, financial markets indicated a likelihood of around two-thirds that the Bank of England‘s Bank Rate would reach 6% by February, a rise from the current 5.25%.
Petrol and diesel
The UK inflation rates of petrol and diesel, which experienced a remarkable 25% decline compared to a year ago, played a substantial role in pulling down overall inflation.
Conversely, there were noticeable price hikes for various goods and services. Sugar prices escalated by 55%, while transport insurance costs surged by 50%, marking the most significant increase since record-keeping began in the late 1980s.
These data are indicative of an impending resurgence of wage growth in real terms, a phenomenon that has been negative since April of the preceding year when adjusted for CPI.
Regarding inflationary pressures within the manufacturing sector, there were indications of a softening. Factory gate prices dropped by 0.8% in the 12 months leading up to July, marking the weakest reading since October 2020. Additionally, manufacturers’ input prices experienced a notable decline of 3.3%, the largest fall since May 2020.