UK inflation falls to 7.9% in June, under expectations

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LONDON – UK inflation slowed significantly in June, coming in at 7.9% a year, below consensus expectations.

Economists polled by Reuters had forecast an 8.2% annual rise in the headline consumer price index after a better-than-expected 8.7% reading in May, but annual inflation remains well above the Bank of England’s 2% target .

On a monthly basis, the headline CPI increased by 0.1%, below a consensus forecast of 0.4%. Core inflation – which excludes volatile energy, food, alcohol and tobacco prices – remained steady at an annualized 6.9% but fell from a 31-year high of 7.1% in May.

Falling fuel prices were the largest downward contributor to the monthly change in the annual CPI rate, the Office for National Statistics said on Wednesday. Food prices rose in June, but less than in the same period last year.

“There were no major offsetting upward contributions to the tariff change,” the ONS added.

sterling The US dollar was down 0.6% against the dollar on Wednesday, to hover around $1.296 as of 7:50 am London time.

Treasury Secretary John Glen told CNBC on Wednesday that the stronger-than-expected fall in inflation was “very encouraging”.

“But here at Treasury there is no complacency,” he added. “We are working closely in lockstep with the Bank of England and are looking to halve interest rates this year and bring them down to the long-term norm of 2%.”

The UK is suffering from persistently high inflation, which both the government and the Bank of England have warned could become entrenched in the economy as a cost of living crisis and a tight labor market push up wage prices.

Bank of England Governor Andrew Bailey and UK Treasury Secretary Jeremy Hunt told an audience in the City of London earlier this month that high wage deals would hamper their efforts to contain inflation.

The Organization for Economic Co-operation and Development last month forecast that the UK will experience the highest inflation rate of any advanced economy this year, at a compound annual rate of 6.9%.

The Bank of England raised interest rates by 50 basis points last month, the 13th straight hike, as the Monetary Policy Committee struggles to dampen demand and contain inflation.

After the UK interest rate has risen from 0.1% to 5% over the past 20 months, markets are just pricing in another aggressive half a percentage point hike to 5.5% at the MPC meeting in August.

A “Glimmer of Light”

Though energy and fuel prices are pushing headline inflation in the “right direction,” stubbornly high core inflation and food costs mean Wednesday’s release is unlikely to bring “real relief to struggling households and businesses,” said Suren Thiru, economics director on Institute of Chartered Accountants in England and Wales.

“The fall in inflation in June should be followed by a sharp drop in July, with lower energy bills – following Ofgem’s energy price cap cut – likely to push the headline rate below 7%,” Thiru said in a statement.

He added that core inflation should remain on a downward trend as the lagged impact of the Bank of England’s monetary tightening and government tax hikes weigh on demand. However, he warned that this will come “at the expense of a significantly weaker economy and higher unemployment”.

“While interest rates are likely to rise again in August, focusing too much on fresh inflation data when setting interest rates can lead to damaging policy mistakes given the long time lag between rate hikes and their impact on the broader economy,” Thiru said.

Marcus Brookes, chief investment officer at Quilter Investors, said the fall in CPI was a “ray of hope” but “still keeps asking us why the UK is such a sharp outlier in terms of inflation” among major economies .

“Demand has withstood both inflation and rising interest rates, but cracks are showing and as more mortgage holders become exposed to current interest rates, the economy is likely to suffer.”

Brookes cautioned that this path to a probable recession next year may be necessary to bring inflation back on target as the Bank of England continues to hike rates and fiscal tightening is unlikely as the government is in the year 2024 faces elections.

“Inflation should return to more comfortable levels soon, but as we have seen, these forecasts are unpredictable,” he added.

“For investors, this means seeking refuge in quality companies that can navigate this difficult environment, while also considering UK fixed income assets such as UK government bonds, which are attractively priced at this time as we head towards what could be a difficult economic cycle .”

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