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Lower gas and electricity costs drove a sharp drop in UK inflation to 6.8 per cent in July from 7.9 per cent the previous month, the lowest rate of price increases since February last year.
The headline figure, published on Wednesday by the Office for National Statistics, met economists’ expectations and will come as a modest relief after wage data on Tuesday was surprisingly strong. But the details suggested Britain had not made progress in solving its inflation problem.
Stripping out food and energy prices, core inflation rose at an unchanged annual rate of 6.9 per cent in July and services prices increased at a faster pace, maintaining pressure on the Bank of England to do more to restore price stability.
Suren Thiru, economics director at the ICAEW accountancy trade body, said: “Although these figures provide reassurance that the inflation tide has turned, this latest drop owes more to lower energy bills, following the reduction in Ofgem’s energy price cap, than to a broader easing of price pressures.”
The lower quarterly energy price cap led to a 15 per cent fall in gas and electricity prices in July, which contributed to an overall 0.4 per cent drop in prices compared with last month.
Food prices stabilised in July, rising only 0.1 per cent in the month and bringing the annual rate of food price inflation down from 17.3 per cent to 14.9 per cent.
Market reaction to the data was muted, as it was close to expectations. Sterling edged higher to $1.274 against the dollar, with the yields on gilts barely moving in morning trading.
But the improvements in energy and food prices were offset by signs that most other areas had no moderation in pricing pressures.
Prices of core goods rose 0.3 per cent over the month, with the annual inflation rate remaining constant at 6.9 per cent rather than dropping to 6.8 per cent as economists expected.
Worse news for the Bank of England was that services prices, which officials see as the best indicator of underlying domestic inflation, rose 0.8 per cent in July. The annual rate of services inflation increased from 7.2 per cent in June to 7.4 per cent, the highest rate since March 1992 for this element of overall inflation.
Economists said this would worry policymakers because it showed inflation had spread from an unavoidable consequence of higher wholesale gas and electricity prices to a more entrenched domestic problem.
Paula Bejarano Carbo, an associate economist at the National Institute of Economic and Social Research, said: “We have yet to see a turning point in the underlying rate of inflation, which remains stagnant at around 7 per cent.”
Ruth Gregory, deputy chief UK economist at Capital Economics, said: “With wage growth and services inflation both stronger than the bank had expected, it seems clear that the bank has more work to do.”
Although the underlying data showed worse inflationary pressures than hoped, chancellor Jeremy Hunt hailed the fall in the headline rate as a mark of progress towards the government’s target of halving the inflation rate this year.
But he noted there was more work to do. “We’re not at the finish line. We must stick to our plan to halve inflation this year and get it back to the 2 per cent target as soon as possible,” he said in a statement.
Some economists cast doubt on the likelihood of Prime Minister Rishi Sunak hitting the target to halve inflation, which would require the rate in the fourth quarter of the year to fall at least to 5.3 per cent.
The Institute for Fiscal Studies said it was far from a foregone conclusion that the prime minister would meet his target because most of the known improvements in energy and food had happened and there still needed to be progress in moderating price rises in other areas.
Heidi Karjalainen, a research economist at the institute, said: “The progress that has been made is mainly due to the fact that commodity and energy prices are no longer increasing at the rates they were last year. The challenge is that core inflation remains stubbornly high, and considerably higher than was expected back at the start of the year.”
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