UK inflation slows to lowest level in more than a year

By Hanna Ziady, CNN

London (CNN) — UK inflation slowed to its lowest annual rate since March 2022 last month, making it more likely the Bank of England will raise interest rates by only a quarter of a percentage point next month.

Consumer prices rose 7.9% last month compared with a year ago, down from 8.7% in May, the Office for National Statistics said Wednesday. Economists polled by Reuters had forecast an increase of 8.2%.

“Inflation slowed substantially … driven by drops for motor fuels,” ONS chief economist Grant Fitzner said in a statement.

Core inflation, which strips out volatile food and energy costs and is a better gauge of the underlying trend in prices, came in at 6.9%, down from 7.1% in May, which was the highest rate in 31 years.

Food price inflation also fell, to 17.3% from 18.3% in May, with prices still rising strongly last month compared with a year ago but by less than in May.

The data will provide some relief to the Bank of England, which has hiked borrowing costs at every meeting since December 2021, taking its benchmark interest rate to 5% last month.

Paul Dales, chief UK economist at Capital Economics, said the slowdown in price rises could “tilt the balance towards” a hike of a quarter of a percentage point rather than half a percentage point, as in June.

Likewise, markets are now forecasting a quarter-point rise to 5.25% when the central bank meets on August 3.

KPMG chief economist Yael Selfin said the fall in core inflation — as well as in services inflation, which includes the cost of things like hotels, haircuts and eating out — “could point to a weakening of underlying inflationary pressures, following a string of increases fueled by strong wage pressures in the labor market.”

Annual services inflation fell to 7.2% in June from 7.4% in May.

Capital Economics forecasts that UK interest rates will peak at 5.5%. “Overall, the UK will probably still have higher rates of inflation than elsewhere for a while yet,” Dales added.

Households, firms still under pressure

For consumers and businesses, there will be little immediate relief.

“Let’s not forget, most prices aren’t falling, they are merely rising at a marginally slower rate,” said Kevin Bright, a pricing expert at McKinsey.

Inflation reached multi-decade highs in the past year, eating into wages as pay increases failed to keep up. At the same time, rising interest rates have made mortgages and other loans more expensive, squeezing household finances and weighing on companies’ profit margins.

More than two million mortgage holders in the United Kingdom are bracing for a sharp increase in their monthly repayments when they are forced to refinance fixed-rate deals this year and next.

And according to estimates by the National Institute of Economic and Social Research, more than a million households are likely to see their savings wiped out by the end of the year due to higher mortgage bills.

The country’s prolonged cost-of-living crisis continues to fuel the worst wave of industrial action for three decades.

Strikes planned by train drivers and airport workers in the coming weeks threaten to cause travel chaos at the start of school summer holidays. The London Underground is expected to be brought to a standstill between July 25-28 due to a walkout by train drivers.

Baggage handlers and ground staff at Gatwick Airport, meanwhile, are due to strike from July 28 to August 1 and from August 4 to August 8.

According to the ONS, the UK economy lost nearly 2.5 million working days to strikes between June and December 2022, the highest since 1989.

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