Closing post
A quick recap.
Fears are swirling that the UK could be pushed into recession by high interest rates, despite a welcome drop in inflation this morning.
The UK’s annual inflation rate fell sharply to 6.8% in July, from 7.9% in June, as the drop in energy prices over the past year led to the smallest increase in the cost of living since February 2022.
Despite the large fall in the consumer prices index (CPI), the government’s preferred measure of inflation, analysts said the outlook was not improving rapidly enough to prevent further interest rate increases from the Bank of England.
Dr George Dibb, head of IPPR’s Centre for Economic Justice, warned that higher borrowing costs would hit growth, saying:
“It’s good news that headline inflation is lower, especially with energy bills coming down, but there is a very real risk that a recession may soon overtake price rises as the main economic concern.
The financial markets are indicating that another rate hike, in September, is nailed on – probably lifting Bank rate from 5.25% to 5.5%, on the way to a peak of 6% next February.
The drop in CPI means that for the first time since autumn 2021, prices are increasing less rapidly than wages, which rose by 8.2% year on year in the three months to June, adding to pressure on Bank policymakers to increase rates for a 15th time since December 2021 when they meet next month.
The ONS said the main reason behind July’s fall was that the big jump in gas and electricity bills in the same month last year had not been repeated, although there was a decline in annual food inflation last month to below 15%.
Matthew Corder, the ONS deputy director of prices, said:
“Inflation slowed markedly for the second consecutive month, driven by falls in the price of gas and electricity as the reduction in the energy price cap came into effect. Although remaining high, food price inflation has also eased again, particularly for milk, bread and cereal.”
But core inflation, which strips out volatile items such as fuel and food, was unchanged at 6.9% last month. Service sector inflation, closely watched by Threadneedle Street as an indicator of domestically generated price pressure, picked up from 7.2% to 7.4%.
Here’s the full story:
Some economists warned that the government could still miss its target of halving inflation by the end of this year.
Prime minister Rishi Sunak told ITV News:
“I’m not complacent about this at all.
“When I set out that target, people said – that’s easy, he’s not ambitious enough – I don’t think it was, I think it’s an ambitious target.
“It might make people feel better in the short term to borrow lots of money to do lots of things but it would also mean that prices stay higher for longer and mortgage rates stay higher for longer and I’m not going to do that.”
Chancellor Jeremy Hunt warned that the battle against inflation wasn’t over, saying:
While price rises are slowing, we’re not at the finish line.
Shadow chancellor Rachel Reeves pointed out that UK inflation was higher than many other major economies, adding:
“After 13 years of economic chaos and incompetence under the Conservatives, working people are worse off”.
Simon French, chief economist at Panmure Gordon, has flagged that the UK’s inflation rate is still over two percentage points above the G20 average…. but it is closing the gap….
At +6.8% YoY (+7.9% prev.) UK CPI remains 220bp above the G20 average. But this spread is the smallest for 11 months - having peaked out at +440bp in March. This spread should narrow further in October as the outsized role of UK domestic energy prices wanes further pic.twitter.com/UFbauUJKBu
— Simon French (@shjfrench) August 16, 2023
There is proving to be quite a long legacy of the Spring 2023 surge in UK core inflation - driving elevated annual inflation numbers. But looking at more timely indicators (a rolling 3m average of monthly UK inflation) this has come down to 0.42% MoM. Whatever your takeaway from… https://t.co/LmIC6cY7Zn pic.twitter.com/VOhoefZNOZ
— Simon French (@shjfrench) August 16, 2023
