Rishi Sunak and Jeremy Hunt will be breathing a big sigh of relief at the latest inflation figures. It is too soon to say Britain’s cost of living crisis is over but the prime minister and chancellor will be hoping the sharp drop in the annual rate of price increases in June is a watershed moment.
On the face of it, there is not a great deal to crow about. At 7.9%, the annual increase in the cost of living as measured by the consumer prices index is still running at four times the government’s 2% target.
But for the first time since January, inflation has come in below the level expected by the financial markets. That goes for headline inflation and core inflation, the measure that excludes volatile items such as food and fuel, and which came down from 7.1% to 6.9% in June. The City had thought headline inflation would drop to 8.2% and that core would remain unchanged.
Inflation in the service sector also fell last month, from 7.4% to 7.2%. That is significant not only since services make up about four-fifths of the economy’s total output but also because what is happening to the price of services is seen by economists as a guide to inflation generated by the domestic economy.
A further piece of good news for the government is that producer price inflation – a guide to price pressures early in the pipeline – is moving in the right direction. The cost of fuel and raw materials fell by 2.7% in the year to June, while the cost of goods leaving factory gates rose by only 0.1%.
At the start of the year, Sunak made a halving of inflation – then running at above 10% – one of his five pledges to the public: the latest data from the Office for National Statistics means the prime minister might just be about to fulfil his promise.
There are a few other conclusions to be drawn from all this. First, inflation is now on a clear downward path, albeit not as rapidly as in some other countries. Spain’s inflation rate, for example, is below 2%. The ONS says there are reasons why UK inflation has been slower to respond to lower global energy prices: the timing of the big increases in energy bills last year and the tendency of Britain’s supermarkets to lock themselves in to longer-term contracts with food suppliers than their counterparts elsewhere in Europe.
Second, the drop in the inflation rate doesn’t mean prices are falling, merely that they are rising at a slower rate. Household budgets are still under pressure, with the cost of food up by more than 17% in the past year. What’s more, inflation in the services sector may prove tougher to budge than in the goods sector.
Finally, the drop in inflation is not going to be enough to prevent the Bank of England raising interest rates again next month but it does make it more likely that Threadneedle Street’s monetary policy committee will be opting for a quarter-point rather than a half-point increase and that official borrowing costs are closer to a peak.
If the Bank hits the pause button at 5.5%, rather than the 6.5% some had previously feared, that will mean cheaper mortgages and a boost to the housing market.
