Consumer prices in Britain rose 7.9 percent in June from a year ago, the Office for National Statistics said on Wednesday, the slowest rate of inflation in more than a year.
The slowdown, which was greater than economists expected, will bring some relief to the government after months of inflation several times higher than expected. The annual rate of price growth slowed from 8.7 percent in May. The decline was driven by a large drop in the price of motor fuels.
Food prices rose by 17.3 percent in June from the previous year. While that is still high, food inflation has fallen from a peak of 19 percent in April. The relaxation of price increases here also helped pull down the general rate of inflation.
Core inflation, which excludes food and energy prices, was 6.9 percent in June, down from 7.1 percent the previous month.
Why It Matters: Inflation is still stubbornly high.
Headline inflation rates eased, but policymakers are closely watching other measures of price pressure, which signal how deeply inflation has become embedded in the British economy. A price rise in the service sector, and an increase in wage growth, are signs of persistent inflation and among the reasons the central bank raised interest rates to the highest level since 2008.
In June, some of these price pressures eased: Inflation in the services sector slowed slightly to 7.2 percent, and core inflation declined for the first time since January.
Wednesday’s data was “a rare and welcome downside surprise,” said Andrew Goodwin, an economist at Oxford Economics. But he warned that some of the reasons for the slowdown came from price categories that can be volatile, including furniture prices.
“I don’t think this release is a game changer,” Mr Goodwin added. “Basically, wage growth and service inflation are too high.”
High prices have eaten away at household budgets for a year and a half. In January, the government promised to halve the inflation rate by the end of this year, which would mean a drop to 5.2 percent.
Inflation is expected to slow down significantly in the second half of this year, when the impact of last year’s increase in energy prices will no longer affect the annual calculations, and consumers will start to see the benefits of lower production costs for manufacturers.
But the pace of this slowdown has become another source of uncertainty. In recent months, inflation readings have been surprisingly high, and the Bank of England has reinforced its warnings that inflation is stickier than officials expected.
Background: A tight labor market is fueling inflationary pressures.
Achieving the government’s promise will not solve Britain’s inflation problem. The central bank has a mandate to ensure price stability, which is measured as 2 percent inflation.
Like its neighbors in Europe, inflation in the UK was pushed up by rising energy prices last year. But as wholesale prices have fallen this year, the benefit has been slow to trickle down to British households, partly because energy price caps are set quarterly by a government regulator.
This partly explains the relatively high inflation rate in the UK – which is higher than in Western Europe and doubles the rate in the US – but there are other reasons that inflationary pressures in the UK are strong.
Britain still has more people in the workforce than before the pandemic, unemployment is low and jobs are high. Employers raise wages to attract and retain workers. Even if most of these wage increases do not keep pace with inflation, wage growth risks becoming a persistent source of higher prices as companies pass on higher labor costs.
Pay in the private sector rose 7.1 percent in the three months to May compared with a year earlier, a record high outside the pandemic when furloughs skewed the data.
What’s next: The central bank expects to raise rates.
The Bank of England raised its interest rate for the 13th time last month, to 5 percent, from 0.1 percent at the end of 2021. But investors expect rates to rise further when policymakers meet again in early August.
“Inflation is unacceptably high,” Andrew Bailey, the bank’s governor, said last week. He added that the current pace of price and wage growth is not consistent with the bank’s 2 percent inflation target.
Mr Bailey and the government have said the pain of higher interest rates is less than the pain of persistently high inflation, but each rise in interest rates comes as another blow to mortgage holders who need to renew the terms of their fixed-rate loans. .
Many mortgage rates will jump above 6 percent, from below 2 percent. By the end of this year, around three million mortgage holders will experience an increase of up to £500 a month in their repayments, the Bank of England estimates.