Much-needed good news on inflation

Finally! After more than a month of consistently dire data on the state of the UK economy, fresh inflation figures are bringing some much-needed respite to mortgage holders, business owners and all those struggling with the cost of living crunch.

The cost of government borrowing fell sharply today after the ONS revealed that inflation dropped to 7.9% last month – a steeper fall than expected. 

After the rate of prices rises refused to budge in April and May, economists had anticipated a modest drop from 8.7% to 8.2%.

So June’s surprise fall comes as welcome relief. Last month’s particularly gloomy CPI readings had cast doubt on the feasibility of Sunak’s pledge to halve inflation and heightened concern that the UK was increasingly becoming a global outlier in its struggle to tame the beast of inflation. 

The drop to 7.9% was driven largely by falling fuel prices, themselves driven by a fall in the price of crude oil. The decelerated rate at which food prices increased also played a part. 

Crucially, core inflation – which excludes more volatile prices like food and energy and is considered a key indicator of underlying inflationary pressures – also dipped further than expected in June, falling to 6.9% from 7.1% the month before. May’s unexpected rise in core inflation had been the thing concerning economists most of all. 

Markets have reacted well to the latest inflation reading, reversing some of the concerning moves in recent weeks that helped to drive up mortgage costs. 

Two year gilt yields – a measure of the cost of government borrowing for a two-year loan – fell sharply this morning below 5% to 4.84%, after peaking at 5.5% earlier this month. This should help reduce two-year fixes for mortgages in the coming weeks. 

Financial analysts are no longer predicting that interests rates will rise above 6%. The Bank of England is still expected to raise rates next month but it may well opt to add 0.25% onto the current rate of 5%, as opposed to a half point rise. 

While any news of inflationary easing is welcome, there’s still a long way to go. 

Prices are, of course, still rising, simply at a slightly slower rate than the month before. And this current rate is still four times greater than the Bank of England’s target – to get inflation down to 2%. According to Cebr forecasting, we cannot expect an inflation rate within one percentage point of the target until 2025. 

While the UK is less of a global outlier than it was during last month’s data – in the sense that the rate of inflation is, at least, now falling – we are still lagging behind other G7 economies. Inflation is running at 3% in the US and 5.5% in the eurozone. 

What’s more, the slowdown in the rate of food inflation may not last: as Anthony Peters reminds readers in Reaction today, Russia’s withdrawal this week from the landmark deal allowing the safe passage of Ukrainian grain exports through the Black Sea could, once again, send global food prices soaring.

For now though, we can cling onto a small sign of encouragement: inflation is no longer stuck, it is once again moving in the right direction.