Why this matters: Inflation is still very high.
Headline inflation rates have declined, but policymakers are closely watching other measures of price pressures for signs of how deeply inflation has become embedded in the British economy. Price increases in the services sector, and a pick-up in wage growth, are signs of persistent inflation and the central bank has raised interest rates to the highest level since 2008.
In June, some of these price pressures eased: inflation in the services sector slowed slightly to 7.2 percent, and core inflation declined for the first time since January.
Andrew Goodwin, an economist at Oxford Economics, said Wednesday’s data was “a rare and welcome negative surprise”. But he cautioned that some of the slowdown is due to price categories that can be volatile, including furniture prices.
Mr. Goodwin said, “I don’t think this release is a game changer.” “Fundamentally, wage growth and service inflation are very high.”
High prices have spoiled the domestic budget for one and a half years. In January, the government promised to halve the inflation rate by the end of this year, which would mean a decline of 5.2 percent.
Inflation is expected to ease meaningfully in the second half of this year, when the impact of last year’s rise in energy prices will no longer affect annual calculations, and consumers begin to see the benefits of declining production costs for manufacturers Will be done.
But the pace of this slowdown poses another source of uncertainty. In recent months, inflation readings have been surprisingly high, and the Bank of England has intensified its warnings that inflation is more stable than officials expected.
Background: The tight labor market is adding to inflationary pressures.
Fulfilling the government’s pledge will not solve Britain’s inflation problem. The central bank is empowered to ensure price stability, which is measured as 2 percent inflation.
Like its neighbors in Europe, inflation in the UK rose last year due to rising energy prices. But since wholesale prices have fallen this year, the benefits have been slow to reach British households, as energy price caps are set quarterly by a government regulator.
This partly explains Britain’s relatively high inflation rate – higher than in Western Europe and twice the rate in the United States – but there are other reasons why inflationary pressures are stronger in Britain.
There are still more people out of the workforce in the UK than before the pandemic, unemployment is low and job vacancies are high. Employers are raising wages to attract and retain workers. Even though most of these wage increases are not in line with inflation, wage increases risk becoming a stubborn source of higher prices as companies bear the burden of higher labor costs.
Pay in the private sector rose 7.1 percent from a year earlier in the three months to May, a record high outside the pandemic when the holiday distorted the data.
What next: The central bank is expected to raise rates.
The Bank of England last month raised its interest rate for the 13th time to 5 percent, up from 0.1 percent at the end of 2021. But investors expect rates to go higher when policymakers meet again in early August.
The bank’s governor, Andrew Bailey, said last week that “inflation is unacceptably high.” He said the current pace of price and wage growth is not commensurate with meeting the bank’s 2 per cent inflation target.
Mr Bailey and the government have said the pain of higher interest rates is less than the pain of persistently high inflation, but each increase in interest rates is another blow to mortgage holders who need to renew the terms on their fixed-rate loans. .
Many mortgage rates will increase from below 2 percent to above 6 percent. The Bank of England estimates that by the end of this year, around three million mortgage holders will experience an increase of up to £500 a month on their repayments.