Consumer price inflation in the United Kingdom eased as expected in July to its lowest in 17 months, mainly propelled by lower energy prices, official figures showed Wednesday, a welcome development for hard-pressed households struggling during the cost-of-living crisis.
Still, worries persisted as some of the key measures of price growth monitored closely by the Bank of England (BoE) failed to drop, reinforcing bets that the central bank will press on with its campaign of interest rate hikes.
The annual rate of inflation, as measured by the consumer price index (CPI), was 6.8% in July, the Office for National Statistics (ONS) said, marking its lowest level since February 2022, the month Russia invaded Ukraine and sent energy prices surging.
The decline from June's 7.9% rate was in line with economists' expectations.
The headline figure moved further away from October's 41-year high of 11.1% but is still far above the central bank's 2% target.
The statistics agency said the fall was largely driven by lower gas and energy prices as last year's sharp increases fell out of the annual comparison.
It said food price inflation, which also spiked sharply in the wake of Russia's invasion of Ukraine, eased too.
Though the decline in the headline rate of inflation will be welcome news for hard-pressed households, it's unlikely to derail market expectations that the BoE will raise interest rates again next month, especially as wages are rising at a record high.
Earlier this month, the bank raised its benchmark interest rate to a fresh 15-year high of 5.25% and hinted that it would stay high for some time to bring down persistently high inflation.
Higher interest rates help dampen inflation by making it more expensive for consumers and businesses to borrow to buy homes, cars or equipment.
Central banks around the world have been raising borrowing costs to combat inflation unleashed by higher energy prices after Russia invaded Ukraine and supply chain backups as the global economy recovered from the coronavirus pandemic.
Despite the drop in the headline figure, Britain retains one of the highest rates of price growth in Western Europe, with only Iceland and Austria suffering higher inflation.
It ranks first among the Group of Seven (G-7) industrial nations, raising concerns it is stickier in the country than elsewhere. Inflation in the U.S. stands at 3.2% and at 5.3% across the 20 countries that use the euro currency.
"Inflation has fallen rapidly over the past six months, but the U.K. still has the highest rate in the G-7 and the Bank of England faces a daunting task in further taming price pressures," said James Smith, research director at the Resolution Foundation think tank.
Similarly, the British economy is the only G-7 leading industrial economy yet to recoup the output lost during the coronavirus pandemic. Many economists blame Britain's departure from the European Union for both sticky inflation and anemic growth, as it has hobbled trade and added costs to businesses.
'Not at finish line'
"With wage growth and services inflation both stronger than the Bank had expected, it seems clear that the Bank has more work to do," said Ruth Gregory, an economist at consultancy Capital Economics.
Figures published on Tuesday showed basic wages in Britain rose at a record pace in the three months to June, helping workers to recover some of their lost spending power but adding to the worries for the BoE.
The BoE is watching core inflation – which strips out volatile food and energy prices – and consumer services prices closely.
Core inflation remained at 6.9% in July, flat versus the June reading, and higher than expectations in the Reuters poll for a reading of 6.8%.
Services inflation, which mostly reflects home-grown inflation pressure from wages, rose to 7.4% from 7.2% in June – a little higher than the BoE had forecast.
Financial markets on Wednesday showed a roughly two-thirds chance that the BoE's Bank Rate will hit 6% in February, up from 5.25% now.
"While price rises are slowing, we're not at the finish line," Treasury chief Jeremy Hunt said in response to the figures.
"We must stick to our plan to halve inflation this year and get it back to the 2% target as soon as possible," Hunt noted.
Petrol and diesel prices – down a record 25% on a year ago – were another big drag on inflation.
But there were painful increases for other goods and services. Sugar prices rose by 55%, while transport insurance costs were up 50%, the biggest rise since records started in the late 1980s.
The data are likely to herald an imminent return to wage growth in real terms, which has been negative since April last year, adjusted for CPI.
There were signs of a weakening of inflation pressure ahead from the manufacturing sector as factory gate prices fell by 0.8% in the 12 months to July, the weakest reading since October 2020. Manufacturers' input prices fell by 3.3%, the biggest fall since May 2020.
The strength in core inflation is bad news for Prime Minister Rishi Sunak, who has promised to halve inflation by the end of the year – a goal that is now in question.
"With only four months to go, it no longer seems at all clear that inflation at the end of the year will have fallen by enough to achieve it," said Heidi Karjalainen, an economist at the Institute for Fiscal Studies, a think tank.