UK inflation falls more than expected to 7.9% in June

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UK inflation eased more than expected to a 15-month low of 7.9 per cent in June, making it more likely that the Bank of England will only raise interest rates by a quarter point next month.

Annual inflation was down from 8.7 per cent in May, the Office for National Statistics said on Wednesday. It was lower than the 8.2 per cent forecast by economists polled by Reuters, ending a four-month period of price growth exceeding forecasts.

It was also in line with the 7.9 per cent forecast by the BoE in May and the lowest since March 2022.

Sterling fell to its lowest in a week, trading 0.6 per cent down against the dollar at $1.2952. 

Core inflation, which strips out volatile food, energy, alcohol and tobacco prices, also declined to 6.9 per cent in June from a 31-year high of 7.1 per cent in the previous month. Analysts expected it to be unchanged.

Services inflation eased to 7.2 per cent in June from 7.4 per cent in May.

Both core and services inflation are closely watched by BoE policymakers to monitor underlying and domestic price pressures and to decide on interest rates.

Markets have shifted to pricing a 60 per cent probability that the BoE will raise interest rates by a quarter of a percentage point to 5.25 per cent at its next meeting on August 3, to bring inflation back to its 2 per cent target. They had been pricing in a better than even chance of a larger half-percentage point increase before Wednesday’s news.

Traders expect BoE interest rates to peak just below 6 per cent early next year, compared with just above 6 per cent prior to the inflation figures.

Economists have also changed their expectations. Paul Dales, economist at Capital Economics, said that the falls in headline and core inflation “are unlikely to be enough to prevent the Bank of England from raising interest rates in early August from 5 per cent, although it may tilt the balance towards a 25 basis points hike rather than 50 basis points”.

Lower inflation is likely to ease the pressure on mortgages after stronger than expected price and wage growth over the previous months had pushed up interest rate expectations and therefore payments for borrowers.

The data will be welcome news for UK prime minister Rishi Sunak, who has pledged to halve inflation this year before a probable 2024 election.

Chancellor of the Exchequer Jeremy Hunt said: “Inflation is falling and stands at its lowest level since last March, but we aren’t complacent and know that high prices are still a huge worry for families and businesses.”

Grant Fitzner, ONS chief economist, said that in June “inflation slowed substantially to its lowest annual rate since March 2022, driven by price drops for motor fuels”.

Led by motor fuel, the price of transport fell by an annual rate of 1.8 per cent last month.

Although it remained at historically high levels, food inflation also eased to 17.3 per cent in June, from 18.3 per cent in the previous month.

ONS data also showed that the annual growth of producer price inputs, such as parts and materials, turned negative in June for the first time since November 2020. The rate has slowed for the 12th consecutive month from its record annual high of 24.4 per cent in June 2022 to minus 2.7 per cent last month.

Despite the larger than expected decline, UK price growth remained higher than in other G7 countries, with economists blaming a combination of surging energy costs and labour shortages.

In June, US inflation slowed to a 27-month low of 3 per cent, while price growth dropped to a 17-month low of 5.5 per cent in the eurozone.

Dales said: “The UK will probably still have higher rates of inflation than elsewhere for a while yet, but at least the UK is now following the global trend.”

Additional reporting by Mary McDougall