There were hopes on Wednesday that the worst of the long cost-of-living crisis was over as inflation fell sharply, but homeowners were warned they still face further hikes in interest rates.
The Office for National Statistics said the headline measure of inflation — the Consumer Prices Index — dropped to 6.8 per cent in July, down from 7.9 per cent in June.
It means prices are now going up at their slowest rate since February 2022, when Russian tanks rolled into Ukraine and inflation was 6.2 per cent. Crucially, they are also rising less quickly than wages, meaning that most people are getting better off for the first time since October 2021 when the squeeze on living standards began as Covid receded and a bounce-back in the world economy first sent prices spiralling.
On Tuesday, the ONS revealed that average basic pay surged by a record 7.8 per cent in the three months to June so that most workers are at last able to buy more with their pay packets.
David Henry from City investment management firm Quilter Cheviot said: “With inflation falling to 6.8 per cent and yesterday’s data showing wages increased by nearly 8 per cent over the past year, the cost of living crisis may finally be beginning to wane. Households are still under immense pressures however, and inflation isn’t going to fall dramatically, but it will be pleasing to millions to see their take-home pay now seeming to keep up with inflation.”
The sharp fall in inflation — in line with economists’ forecasts — will also ease pressure on the Bank of England to continue hiking interest rates, though at least one more increase is expected next month when the cost of borrowing is likely to rise from 5.25 per cent to 5.5.
However, there was some concern that so-called “core inflation” which excludes food and drink and energy was unchanged at 6.9 per cent.
Headline CPI inflation has been slowly easing since it peaked at 11.1 per cent last October, propelled by rocketing energy prices after the Russian invasion of Ukraine. That pushed up the price of most other everyday items. Today’s figure covers the month when average annual household energy bills fell from the £2,500 level of the Government’s energy price guarantee to the £2,074 of regulator Ofgem’s latest energy bill cap.
The ONS data shows gas bills fell 25.2 per cent between June and July, with electricity bill 8.6 per cent lower. The fall in the CPI was also driven by slower food and drink price rises. They rose by 14.9 per cent, slowest since September 2022. The July inflation figure, as measured by the Retail Prices Index, is normally used as a peg for the following year’s increase in rail fares. However, the Government said yesterday that ticket prices would go up by less than the July RPI, which today came in at 9 per cent.
CPI inflation is forecast to fall back slowly to around five per cent by the end of the year. That would meet Rishi Sunak’s New Year pledge to halve inflation in 2023. Chancellor Jeremy Hunt said: “The decisive action we’ve taken to tackle inflation is working... but 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 per cent target.”
Shadow chancellor Rachel Reeves said inflation remains higher than in other countries after 13 years of Conservative “economic chaos and incompetence”.
