The news
British consumer prices rose 7.9 percent in June from a year earlier, the Office for National Statistics said on Wednesday, the slowest pace of inflation in more than a year.
The slowdown, which was more than economists expected, will bring relief to the government after months of inflation that has repeatedly been higher than forecast. The annual rate of price growth slowed from 8.7 percent in May. The decline is due to a significant drop in the price of motor fuels.
Food prices rose 17.3 percent in June from last year. While that is still high, food inflation has fallen from a peak of 19 percent in April. The easing of price increases here also helped lower the overall rate of inflation.
Core inflation, which excludes food and energy prices, was 6.9 percent in June, up from 7.1 percent the previous month.
Why It Matters: Inflation is still stubborn.
Headline inflation rates are down, but policymakers are closely watching other measures of price pressures that signal how deeply inflation is embedded in the British economy. The increase in prices in the service sector, and the increase in wage growth, are signs of continued inflation and are among the reasons why the central bank raised interest rates to the highest level since 2008.
In June, some of these price pressures eased: Inflation in the services sector eased slightly to 7.2 percent, and core inflation declined for the first time since January.
Wednesday’s data was “a rare and welcome downside surprise,” Andrew Goodwin, an economist at Oxford Economics, said. But he warned that some of the reasons for the slowdown come from price categories that can change, including furniture prices.
“I don’t think this release is a game changer,” added Mr. Goodwin. “Fundamentally, wage growth and service inflation are very high.”
High prices have eaten into household budgets for a year and a half. In January, the government promised to reduce the inflation rate by half by the end of this year, which means it will fall to 5.2 percent.
Inflation is expected to slow down significantly in the second half of this year, when the impact of last year’s energy price increases will no longer influence the annual calculations, and consumers will begin to see the benefits of the reduction in production costs for manufacturers.
But the pace of this slowdown has become another source of uncertainty. In recent months, inflation readings have been surprisingly high, and the Bank of England has raised warnings that inflation is stickier than officials expected.
Background: A tight labor market increases inflationary pressures.
Achieving the government’s promise will not solve Britain’s inflation problem. The central bank has a mandate to ensure price stability, which is measured as 2 percent inflation.
Like its European neighbours, inflation in Britain was boosted by rising energy prices last year. But while wholesale prices have fallen this year, the benefit has been slow to reach British households, in part because energy price caps are set quarterly by a government regulator.
This partly explains the relatively high inflation rate in Britain – which is higher than in Western Europe and twice the rate in the United States – but there are other reasons why inflationary pressure in Britain is strong.
Britain has more people out of work than before the pandemic, unemployment is low and job vacancies are high. Employers push for wage increases to attract and retain workers. Although most of these wage increases have not kept pace with inflation, the risks to wage growth could be a stubborn source of higher prices as companies pass on higher labor costs.
Private sector pay rose 7.1 percent in the three months to May compared with a year earlier, a record high outside of the pandemic when furloughs distort the data.
What’s Next: The central bank is expected to raise rates.
The Bank of England raised its interest rate for the 13th time last month, to 5 percent, from 0.1 percent in late 2021. But investors expect rates to rise higher if the policymakers will meet again in early August.
“Inflation is unacceptably high,” Andrew Bailey, the bank’s governor, said last week. He added that the current pace of price and wage increases is not consistent with achieving the bank’s 2 percent inflation target.
Mr. Bailey and the government say the pain of higher interest rates is less than the pain of persistently high inflation, but each increase in interest rates comes as another blow to mortgage holders who have to change their mortgages. terms of their fixed-rate loans.
Many mortgage rates will increase to 6 percent, up from less than 2 percent. By the end of this year, around three million mortgage holders will experience an increase of up to £500 a month in their payments, the Bank of England estimates.
