High inflation rates are cooling down in the UK, providing some relief to the Bank of England

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CPI +7.9% vs. Reuters Poll +8.2% Core inflation also drops to +6.9% vs. +7.1% Poll UK still has higher inflation than many other countries Sterling declines as data eases Pressure on BoE rising Factory gate prices are down just 0.1% in the 12 months through June

LONDON (Reuters) – Britain’s high inflation rate fell more than expected in June and was at its slowest in more than a year at 7.9 percent, according to data that will ease some pressure on the Bank of England to keep operating. Sharply raise interest rates.

Sterling weakened and investors cut their bets on future increases in borrowing costs as consumer price inflation growth reached its lowest level since March 2022, although it remained above the rate in other large and wealthy economies.

Economists polled by Reuters had mostly expected a slower slowdown, to 8.2% in the 12 months through June, from 8.7% in May.

The Bank of England said in May that it expected inflation to ease in June to 7.9%, further away from October’s 41-year high of 11.1% but still well above its 2% target.

“The UK still has one of the highest rates of inflation of any advanced economy, but after today it only looks bad, not tough,” said James Smith, head of research at Resolution think tank.

“This is a very welcome improvement.”

The British pound fell more than 0.5% against the US dollar and touched its lowest level against the euro since May.

Markets now estimate that a quarter-percentage-point hike in interest rates on August 3rd is more likely than the half-percentage-point hike priced in on Tuesday. The bank rate no longer peaks at 6%. UK government bond prices rose and home builders jumped.

Core inflation – which excludes food, energy, alcohol and tobacco prices and which the Bank of England uses to gauge core price pressures – also fell to 6.9%, compared with a three-decade high in May of 7.1%.

Economists polled by Reuters had expected the core measure of price growth to hold steady at 7.1 percent.

Reuters graphics Low fuel price

The Office for National Statistics said petrol and diesel prices – which are down 23% from last year – were the biggest drag on overall inflation.

But there have been painful increases in other goods and services. Sugar prices rose 54%, while transportation insurance costs rose 48%, the largest increase since records began in the late 1980s.

Bank of England Governor Andrew Bailey has faced criticism from investors and former BoE officials after inflation continued to rise higher than expected, despite 13 consecutive rate hikes since December 2021 that raised the risk of a recession.

Prime Minister Rishi Sunak has promised to halve inflation by the end of 2023 ahead of national elections expected in 2024, a target Finance Minister Jeremy Hunt says is challenging.

Responding to Wednesday’s data, Hunt said the government and the Bank of England had taken aggressive action to bring down inflation. “We’re seeing the first fruits of that, but it’s a long way to go,” he said.

The opposition Labor Party, which is leading in opinion polls, has accused Sunak’s Conservatives of presiding over a “mortgage debacle” as homeowners see borrowing costs soaring.

Despite June’s decline, Britain’s inflation rate remains the highest among the world’s seven richest economies. In Western Europe, only Iceland recorded a higher inflation rate in June.

Reuters graphics Reuters graphics

Services prices, which are closely watched by the Bank of England, rose 7.2% year-on-year, slowing from 7.4% in the 12 months to May.

There were signs of weakening inflationary pressure ahead as factory gate prices rose just 0.1% in the 12 months through June, the lowest reading since December 2020.

Input prices for manufacturers fell 2.7%, the largest drop in nearly three years.

A Reuters poll of economists had indicated an increase in output prices by 0.5% and a fall of 1.6% in input prices.

Inflation has fallen more slowly in Britain than in other countries, in part because of the way energy subsidies are repriced every six months. The next reset, which will reflect lower prices, begins on July 1.

Suren Theroux, director of economics at ICAEW, the accounting body, said the inflation rate in July was likely to slow to below 7%.

The Bank of England has expressed concern that strong wage growth could keep price growth higher for longer than it expects inflation to fall to just over 5% in late 2023 before falling below its target of just 2% in early 2025.

Data released earlier Wednesday showed that wage adjustments held at 6% in the second quarter, holding at the highest level in nearly 32 years.

Written by William Schomberg; Additional reporting by William James and Sarah Young. Editing by Catherine Evans

Our Standards: The Thomson Reuters Trust Principles.

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