UK inflation falls sharply to 6.8% as cost of living pressures ease

August 17, 2023

UK inflation falls sharply to 6.8% as cost of living pressures ease

The UK’s annual inflation rate fell sharply to 6.8% in July, from 7.9% in June, as the drop in energy prices over the past year has led to the smallest increase in the cost of living since February 2022.

Financial markets had been bracing themselves for a marked easing in upward price pressure last month, and the figure announced by the Office for National Statistics (ONS) was expected by many economists across the country.

Despite the large fall in the consumer prices index (CPI), which is the government’s preferred measure of inflation, analysts have stated the outlook was not showing signs of improvement that would be enough to prevent further interest rate increases from the Bank of England.

The drop in CPI means that for the first time since autumn of 2021, prices are increasing less rapidly than wages, which rose by 8.2% year on year in the three months to June, adding to pressure on Bank policymakers to increase rates for a 15th time since December 2021 when they convene in September of this year.

The ONS has recently stated the main reason behind July’s fall was that a big jump in gas and electricity bills in the same month last year had not been repeated, although there was a decline in annual food inflation last month to below the value of 15%.

However, there was less encouraging news for core inflation, which strips out more volatile items such as fuel and food. The ONS data showed this remained unchanged at 6.9% last month. Service sector inflation, which is often closely watched as an indicator of domestically generated price pressure, picked up from 7.2% to 7.4% respectively.

The increase in service sector inflation coupled with strong wage growth means that the Bank is more likely to press ahead with another 0.25 percentage point rise in interest rates from 5.25% to 5.50% across September.

July’s decline in CPI also gives Prime Minister, Rishi Sunak, hope that he could hit the target he set in January to halve inflation from its then level of 10.7% by the end of 2023. 

There is now also a very real risk that a recession may soon overtake price rises as the main economic concern. With other countries bringing inflation under control quicker than in the UK, with more support for households and workers avoiding unnecessary pain, the threat of recession still remains unnervingly high.

Food prices rose by 14.9% in the year to July, down from 17.3% in the year to June. Clothing and footwear prices fell by more last month than in July 2022 as the poor weather across the UK has led to more aggressive price cutting by retailers looking to sell excess summer stock.

Separate ONS figures for producer prices – which provide an early indication of inflationary pressure,  fell last month. Industry’s fuel and raw material costs fell by 3.3% year on year, while the cost of goods leaving factory gates dropped by 0.8%.

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