Good morning. Today’s newsletter comes to you a few minutes late so that we can reflect the latest UK inflation figures, released at 7am by the Office for National Statistics. It’s good news: the headline rate has fallen from 10.1% to 8.7%, taking it into single digits for the first time in eight months.
There were widespread expectations of a real drop this time. Since the same thing was true in April and it didn’t happen then, leading to Bank of England governor Andrew Bailey admitting there are “very big lessons to learn” for its forecasting model, this news will have caused a sigh of relief at the central bank – even though the figure is a bit higher than the 8.4% the Bank expected, and food inflation remains very high, at 19%.
To follow the live reaction, head to Jasper Jolly’s live blog. Today’s newsletter, with the Guardian’s economics correspondent Richard Partington, is a straightforward guide to some of the reasons why this has happened, whether we can still hope for a significant drop in inflation by the end of the year, and what it all means for you. Here are the headlines.
Five big stories
UK politics | Boris Johnson has been referred to police by the Cabinet Office over claims that he broke lockdown rules by hosting family and friends at Chequers during Covid. The visits to the former prime minister’s grace-and-favour residence were found in his official diary by lawyers preparing his defence for the public inquiry into the pandemic.
Wales | Police are facing serious questions and community anger after taking almost 24 hours to admit potential involvement in the pursuit of two teenagers, whose deaths sparked riots in Cardiff. Kyrees Sullivan, 16, and Harvey Evans, 15, were killed minutes after CCTV footage appeared to show them being followed by a police van as they rode together on an e-bike.
Migration | Suella Braverman has rushed out fresh proposals that stop most international students from bringing family to the UK. Ahead of the release of figures on Thursday expected to show net migration to the UK is more than 700,000, the government said that only overseas students on courses designated as research programmes will be able to bring dependants.
UK news | Disgraced former entertainer Rolf Harris, whose career as one of the best-loved performers on British TV ended after a series of convictions for indecent assault on teenage girls between 1968 and 1986, has died aged 93. He had been suffering from neck cancer.
US politics | The rightwing governor of Florida, Ron DeSantis, will launch his campaign for the Republican presidential nomination on Wednesday evening in a live appearance with Elon Musk, the billionaire owner of Twitter. Musk has previously expressed support for DeSantis as somebody “sensible and centrist” but said he was not planning to make an endorsement.
In depth: ‘Politicians seem desperate to blame inflation on the Bank of England’
Obviously you already know this, but just in case: the inflation rate is the term for the increase in prices over time. If a bunch of bananas cost £1 a year ago and now costs £1.10, the annual inflation rate for bananas is 10%. That means that your money is worth less. There are various ways to measure that across the whole economy, but the key figures released by the Office for National Statistics this morning are the consumer prices index – the measure of the prices of a “basket” of hundreds of typical items, running from peanut butter and broccoli to streaming service subscriptions and petrol. (For a helpful glossary of some of the terms we use when talking about inflation, see this primer by Larry Elliott.)
Another baseline reminder: while it’s clearly desirable in the current situation for inflation to come down, that doesn’t mean that prices are falling – it just means they’re rising more slowly. And the increased costs baked in over the last 18 months are still a fact of life in most areas. In other words: it’s not that you’re going to feel richer, it’s just that you’ve been living with this for longer.
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Why did the rate come down?
Last month, economists had expected that inflation would come down from 10.4% to 9.8% – but it wound up only declining by half that amount, mostly because food and drink prices rose at their fastest annual rate since 1977. That left the UK as the only country in the G7 with a double-digit figure.
“The story of inflation in the UK over the first half of the year is that it was predicted to fall rapidly, and it hasn’t happened,” Richard Partington said. “It’s been stubbornly high.”
This time around, and notwithstanding that error, economists were even more confident in their prediction that it would fall. “You look at Reuters’ survey of 39 economists in the city – every single one said that they were expecting it to drop,” Richard said. Similarly to the Bank’s 8.4% forecast, the average prediction in that group was 8.2%.
The primary reason for that confidence, which has been broadly borne out this morning, even if the actual 8.7% figure is a little higher: the sharp rise in gas and electricity prices prompted by Russia’s invasion of Ukraine last spring is no longer part of the equation.
“At the start of April 2022, there was a roughly 50% rise in gas and electricity bills when Ofgem increased the price cap,” Richard said. “That was an eyewatering figure. Now the comparison period is with the already high level after that rise happened, so the rate drops.” Sure enough, the ONS said that electricity and gas prices contributed 1.42 percentage points to the fall.
Meanwhile, “wholesale gas and electricity prices have fallen substantially in recent months – European gas prices are close to the levels they were at before Russia’s invasion. Global oil prices have also fallen very sharply. Petrol and diesel prices have been falling because they’re closely linked to that oil price.”
All of that means that even with food price inflation stubbornly high – and it has fallen just 0.1%, from 19.1% to 19% – the headline rate was almost bound to drop. The ONS also said that the better news on energy prices was “offset partially by increases in the cost of second-hand cars and cigarettes”.
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What does that mean for me?
We’re further from the most extreme impacts of the Russian invasion on energy costs, and most consumers will see some benefit as a result, with the energy regulator preparing to lower its cap on energy prices.
On the other hand, any trip to the supermarket is still likely to include some moments of disbelief at the latest hike to the price of a household staple. The reason for the stickiness in that area: “Agricultural commodity prices have fallen very sharply from where they were a year ago, but it takes time for those prices to pass through to consumers,” said Richard.
“Farmers and other food producers buy and sell commodities and energy on long term fixed contracts. So if you were buying fertiliser, say, in summer last year, you’re still going to be charging a high price today.” Still, most economists do expect these prices to drop considerably by the end of the year.
In the end, of course, the answer to this question depends massively on your circumstances. “Poorer households will feel all of this much more keenly than richer ones,” Richard said. That’s not just for the obvious reason that they have less money – but because a higher proportion of the goods they buy are impacted by inflation. “And these are unavoidable life costs that they can’t easily decide to drop when things get tighter.”
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What happens next?
The International Monetary Fund yesterday upgraded its forecasts for UK growth, saying it no longer expects the country to fall into recession this year. (Read Richard’s analysis of why the IMF’s view may give Rishi Sunak cover to resist backbench calls for tax cuts.)
Meanwhile, at a select committee hearing yesterday, the Bank of England governor, Andrew Bailey (above), said that despite the disappointing figures last month and concerns over the Bank’s forecasting model, he believes that inflation has “turned a corner”.
“He’s said that before and been wrong – but I do think that’s probably right this time,” Richard said. (Expect Bailey to respond to the latest figures in an interview on “inflation and the economy” at 2pm today.)
“There is no doubt that it’s going to come down from the current very high levels. The question is how long it will take to get to what would be considered a sustainable level.”
The Bank recently concluded that inflation would be “stickier” than it had previously thought, and changed its prediction of CPI in the last quarter of the year from 3.25% to 5.1%. And it is not expected to get back to the Bank’s target 2% rate until 2025. The fact that today’s figure is higher than expected illustrates how difficult that will be to achieve.
The most urgent policy question is what the Bank will do with interest rates, which it puts up to increase the price of borrowing and reduce demands for goods because people have less money available to spend. Rate rises also mean that businesses borrow less, which “loosens” the labour market by increasing unemployment so that people will accept lower wages. While all of that should help bring inflation down, the negative consequences are obvious.
“The financial markets are expecting the Bank to raise interest rates one more time,” Richard said. “They’re currently 4.5% – the highest rate since 2008 – and the expectation is that they go to 4.75% and then stay there for some time.” This morning’s figures don’t change that expectation: interest rates take some time to filter through into the inflation rate, so it would take a really radical deviation from what was expected to prompt a different course to the one already being plotted out.
With the Bank’s expectations having been recently confounded, yesterday’s committee hearing was pretty uncomfortable for Bailey and his colleagues, who faced questions from Conservative MPs in particular about why their models hadn’t foreseen what really happened. So this morning’s data, within the boundaries of prior expectations, is likely to come as some relief.
In any case, Richard said, “it does sometimes seem as if politicians are desperate to pin responsibility for this on the Bank. There’s no question that it isn’t perfect, and it could do some things better. But it’s not just the Bank of England that has got these forecasts wrong – it’s been the same story everywhere. It can seem as if they’re trying to blame the Bank, rather than examining the management of the economy by the government.”
What else we’ve been reading
Sport
Football | Three people have been arrested in connection with the racist abuse suffered by Real Madrid’s Brazilian forward Vinícius Júnior (pictured above) during a match with Valencia. Four other suspects have been arrested over an effigy of the player that was hung from a bridge in Madrid four months ago. The abuse directed at Vinícius has reopened the debate over racism in Spanish football, with the player saying that Spain is now known “as a country of racists” in his homeland.
Cycling | Geraint Thomas took the Giro d’Italia pink jersey after a commanding performance on the final claim of stage 16. Thomas was beaten by Portuguese rider João Almeida (UAE Team Emirates) but the Ineos Grenadiers rider now appears to be in pole position to claim overall victory this weekend.
Football | David Squires reflects on Manchester City “steamrolling to another trinket” – and some of the awkward off-field issues that contextualise their success. Features a miserable Piers Morgan and a “Scandi Boy-God with thighs like a Norwegian pine tree”.
The front pages
“Johnson referred to police over new claims of Covid rule breach” is our Guardian print splash this Wednesday morning. “Cops probe Boris again” says the Daily Mirror, calling it “Another lockdown scandal”. “Johnson accused of Covid rule breaches” – that’s the Daily Telegraph sounding a bit like this sort of thing’s a first, similar to the i: “Johnson referred to police by Cabinet Office”. The Daily Mail comes out with “Boris threatens to sue Cabinet Office for Covid ‘stitch-up’” which the Daily Express echoes: “It’s a stitch up! Boris faces new police probe into rule-breaking”. The Times has “This is no time to cut taxes, IMF urges Hunt”. A teachable moment on Threadneedle Street in the Financial Times: “BoE has ‘very big lessons to learn’ after failing to spot persistent high inflation”. “Vile Rolf’s secret funeral” – the Sun and the Metro have the same splash headline.
Today in Focus
Is Suella Braverman speeding towards a government exit?
Having set herself up as a rival to the prime minister, the home secretary is facing allegations that she broke the ministerial code. Aubrey Allegretti reports
Cartoon of the day | Daniel Christie
The Upside
A bit of good news to remind you that the world’s not all bad
Hunger and deprivation have been rapidly growing in the UK: almost 10 million adults and four million children do not have enough to eat – which is nearly double what it was a year ago. Ellie Violet Bramley spoke to four people who have been helping alleviate the financial pressures facing the people in their communities.
Deepa Chauhan set up Burnt Oak community food bank in 2021 initially as an eight-week pilot scheme feeding approximately 25 people, and now serving 150 people every fortnight. In Lincolnshire, meanwhile, head teacher Katie Barry ended up running what effectively became a food bank out of her primary school.
Debbie Caulfield, who lives in Eglinton, helped plant a community orchard of plum, pear and apple trees on a piece of council land. It’s important to afford people a level of dignity, she says: “The whole point about it is to not to make people feel as if they’re in need. I’d rather people feel as if they’re doing us a favour by taking the stuff.”
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Bored at work?
And finally, the Guardian’s puzzles are here to keep you entertained throughout the day – with plenty more on the Guardian’s Puzzles app for iOS and Android. Until tomorrow.
