UK inflation slows to lowest level in more than a year

UK inflation eased more than expected in June, slowing to its lowest annual rate since March 2022, official data showed Wednesday.

Consumer prices rose 7.9% last month compared with a year ago, down from 8.7% in May, the Office for National Statistics said. Economists polled by Reuters had forecast an increase of 8.2%.

“Inflation slowed substantially … driven by drops for motor fuels,” ONS chief economist Grant Fitzner said in a statement.

Core inflation, which strips out volatile food and energy costs and is a better gauge of the underlying trend in prices, came in at 6.9%, down from 7.1% in May, which was the highest rate in 31 years.

Food price inflation also fell, to 17.3% from 18.3% in May, with prices still rising last month compared with a year ago but by less than in May.

The data will provide some relief to the Bank of England, which has hiked interest rates at every meeting since December 2021, taking its benchmark rate to 5% last month.

But the numbers are unlikely to avert another rate increase when the central bank meets on August 3, because inflation continues to run significantly above its 2% target.

Strong wage growth also remains a key risk to the inflation outlook. The ONS said last week that average regular pay, which excludes bonuses, increased 7.3% during the March to May quarter compared with a year ago, marking one of the highest growth rates since records began in 2001.

“While the Bank of England will welcome the fall in inflation, it is unlikely to substantially change its hawkish policy stance,” said KPMG chief economist Yael Selfin.

However, Paul Dales, chief UK economist at Capital Economics, said the slowdown in price rises could “tilt the balance towards” a hike of a quarter of a percentage point rather than half a percentage point, as in June.

Selfin said the fall in core and services inflation, which includes the cost of things like hotels, haircuts and eating out, “could point to a weakening of underlying inflationary pressures, following a string of increases fueled by strong wage pressures in the labor market.”

Annual services inflation fell from 7.4% in May to 7.2% in June.

“The main story today is that inflation is lower than expected, fueling a narrative that we are through the worst,” said Kitty Ussher, chief economist at the Institute of Directors. “The Bank of England will hope that this will cause business leaders … to lower their expectations of future inflation, which could then become self-fulfilling.”

— This is a developing story and will be updated.