The UK inflation figures bring welcome news. The annual rate of consumer price inflation fell by more than a percentage point to 6.8% in July. However, stripping out food and fuel, core inflation remains unchanged at 6.9%. Why?
One big reason is the cost of manufactured goods. Manufacturers, like households, have seen a fall in their energy costs over the last year. The global supply chain snags that made importing components expensive have eased.
Figures from the Office for National Statistics for July show that factory input prices fell by 3.3% in the year to July 2023, accelerating a steep decline in cost inflation that started at the beginning of the year and first went negative in May.
July’s factory gate prices reflected some of this decline, falling by 0.8%. However, consumer prices for goods rose by 6.1%.
Manufacturers might say the 9.4 percentage point gap between costs and prices can be blamed on wage rises.
However, unlike the services industry, where wages are a large slice of overall costs, the 8.2% increase in average factory worker earnings in the year to June can only be considered a modest element.
Analysts have struggled to explain why prices are still rocketing in food manufacturing, which is the largest employer in the UK industrial sector. Annual food inflation only slipped from 17.3% in June to 14.9% in July.
Members of the Bank of England’s rate-setting committee are also concerned by the strength of inflation in the services sector, which bucked the trend by increasing prices from 7.2% to 7.4% in July.
Most services are bought by other businesses and they have, on average, healthy finances and a strong demand from their own consumers, leading them to acquiesce when asked to stump up more.
In response, the Bank has only one weapon, and that is to raise interest rates. Higher borrowing limits spending and lower spending forces businesses to drop prices.
It’s a blunt tool only affecting those who need to refinance their borrowing at current rates of interest, which is why the 14 consecutive rises so far in the Bank’s base rate to 5.25% are taking such a long time to take effect.
Rishi Sunak has vowed to halve inflation by the end of the year from 10.7% – the average for the fourth quarter of 2022. To meet his target, the prime minister must be praying businesses moderate their price policies.
Company bosses have begun to realise the economy is slowing, unemployment is rising, and even their middle-income customers will soon become more conservative with their money.
It could mean that without further action from the Bank, price inflation a year from now could be near zero. The December target, though, could be missed.
The Bank, like the prime minister, is in a hurry, and so another interest rate rise is almost certain.
