UK inflation has dropped to a 15-month low of 7.9% in the year up to June, easing concerns for Bank of England (BoE) policymakers who have been grappling with high inflation.
This reading is the lowest since May 2022 and comes as a relief for economists who had predicted a rate dip to 8.2% from 8.7% in both April and May.
The Office for National Statistics (ONS) reported that the easing in food price inflation and falling motor fuel prices contributed to pushing the rate down. Notably, the milk, cheese, and eggs category saw the largest downward contribution, with the annual rate easing to 22.8% from 27.4% in May. Additionally, motor fuel prices fell by 22.7% in the period, compared to a 13.1% decline the previous month.
While the drop in inflation is welcomed, it still remains persistently high and above the Bank of England’s 2% target. The central bank has already hiked UK interest rates 13 consecutive times in its efforts to combat high inflation.
Despite the decline, concerns linger as underlying inflationary pressures continue to plateau around 7%, well above the Bank of England’s target. Economists expect core and service CPI inflation to ease gradually as the effects of previous interest rate rises are felt.
Chancellor Jeremy Hunt acknowledged that inflation is falling but emphasized the need to stick to the plan to halve inflation this year. The pound (GBPUSD=X) retreated on the news, and markets are now forecasting a peak of 6% in March next year, with the Bank likely to increase interest rates again at its next meeting in August.
While the drop in inflation is a positive development, the UK remains an outlier compared to other developed economies. Despite the rate of price rises dropping to 7.9%, it is still significantly above the Bank of England’s desired level for considering a pause in the ongoing rate hikes. The situation continues to be closely monitored by investors and policymakers, as they navigate the path to economic recovery amid persistent inflationary pressures. #UK