UK inflation: ‘Light at the end of the tunnel shines brighter’, but still some way to go

CPI fell to 7.9% in June, but some commentators still expect a 50bps rate rise in August

Myron Jobson, Senior Personal Finance Analyst, interactive investor
Myron Jobson


UK inflation slowed to 7.9% in June, its lowest level since March 2022, beating consensus expectations of 8.2% after four months of upside surprises.

The latest CPI print represents a 0.8 percentage point fall from the 8.7% recorded in May.

Core inflation, which strips out food and oil prices, also fell from a 30 year high to 7.9% from 8.2%.

Guy Foster, chief strategist at RBC Brewin Dolphin, said the data will be “celebrated widely”.

However, he added: “One swallow does not make a summer, but the US has been a few months ahead of Europe in the current inflation cycle and so hopefully, this presages further benign inflation news. Inflation will seem to decelerate sharply towards the end of the year, reflecting the very sharp price increases from 2022 that will no longer form part of the annual rate.

“The pound has dropped sharply on the news, as panic UK interest rate increases will seem less urgent now. For those holidaying in America this summer, spending money just got more expensive.”

See also: Record 7.3% wage growth feeds further inflation fears

What next for interest rates?

With both the headline figure and core inflation remaining at a high level, industry commentators are torn on where this leaves the Bank of England ahead of its next interest rates decision.

Danni Hewson, AJ Bell head of financial analysis, said that while policy makers will be relieved, it will be “short-lived” as inflation remains sizeable despite the cooling. She added that pay rises are impacting core inflation, which looks “scarily sticky”.

Hewson added: “Markets are now pricing in a less strident move in August, with a rate hike of just a quarter percentage point rather than the half point that most had been considering just a few weeks ago and looking further out the expectation is for rates to top off at 5.75% rather than over six which had been on the cards.

“But as seems the way of things during this topsy turvy time, the good news comes with a slice of bad, and the pound has fallen back a touch as rate expectations have been tempered.

“There will be plenty of people still asking why the UK is such an outlier. Why the rest of the G7 has managed to turn things around more quickly and what does it mean for the future?”

See also: How ‘sticky’ will inflation really be?

Meanwhile, T Rowe Price chief European economist Tomasz Wieladek believes markets are reading too much into June’s inflation data and is anticipating a further 50bps interest rate rise in August.

He said: “While UK inflation fell by more than expected today, a lot of this improvement was due to energy and food prices. What the BoE really cares about is domestically generated and services inflation.

He added: “Markets have repriced significantly as a result of this news, now only expecting a peak rate of 5.75%, versus 6.25% before this print. Furthermore, there is now only a 50% chance of a 50bps hike in August, while this was priced at close to 100% ahead of this release.

“I think financial markets are attaching too much weight to this one inflation print, especially because the BoE is concerned about medium-term inflation. Here, the news is still very bleak. Wages inflation, which is the key determinant of services inflation in the medium term, remains at levels implying services inflation of 6-7% one year ahead.

“The BoE’s battle against inflation will only be over once wage growth comes down significantly. Overall, the BoE needs to take out the heat out of the labour market to return inflation to its target in the medium term. We are still very far from this point. Therefore, I continue to believe a 50bps hike in August is the most likely outcome.”

Wreaking havoc on personal finances

While cooling inflation may be good news for policy makers, prices are still rising at a rapid rate.

On the impact today’s inflationary print could have on consumers, Myron Jobson (pictured), senior personal finance analyst, Interactive Investor, said: ““While the light at the end of the tunnel is shining brighter, inflation remains high – almost four times higher than the Bank of England’s 2% target – and continues to wreak havoc on personal finances.

“As prices remain elevated, your hard-earned money just won’t stretch as far, making it difficult to maintain your usual standard of living. With budgets stretched, we’ve seen people cutting back on spending and raid their savings pots at the fastest rate ever recorded to reinforce finances crumbling under the pressure of the cost-of-living storm.

“We all have our own inflation number, and it is worth keeping tabs on your spending habits to get a better idea of the goods and services that are eating most into your budget, and where you could cut back.”

Latest Stories