It looks as if the Bank of England (BoE) is finally starting to win its battle against inflation. After hiking interest rates 13 consecutive times, the headline rate of inflation in the UK finally appears to be heading in the right direction.
The latest figures out from the Office for National Statistics (ONS) show UK annual headline CPI inflation was 7.9% in June, lower than expectations of 8.2%. That figure represents a welcome retreat from May’s reading of 8.7%, which was far higher than policymakers and economists were projecting.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
The inflation problem
At 7.9%, CPI inflation is now sitting at its lowest level since March 2022. But there’s a lot more for the BoE to do. Core inflation, which strips out volatile food and energy prices, declined to 6.9% in June. That's lower than the 31-year high of 7.1% recorded in June, but it's still uncomfortably high - the BoE’s target for CPI inflation is 2%.
Lower fuel prices had the biggest impact on the headline figures. Thanks to lower petrol and diesel prices compared to June 2022, the price of transport fell by an annual rate of 1.8%.
Food inflation also slowed, easing to 17.3% from 18.3% in the previous month.
“Dips in the cost of motor fuels as well as food and non-alcoholic drinks, furniture and household goods, and restaurants and hotels helped to depress the rate of price rises - which represents a course correction having been stuck in the mud in May. Crucially, there were no large offsetting upward effects, notes Myron Jobson, senior personal finance analyst at interactive investor.
“These price declines should give us some breathing room to absorb stubborn and sticky inflation in other key areas of expenditure, like food, which could persist for a little while longer before falling significantly,” he adds.
More notably, the ONS recorded negative annual growth of producer price inputs, such as parts and materials at manufacturing businesses in June. While this number does not impact headline inflation figures, it can be a good indicator of future price growth. A negative reading implies manufacturers may be able to ease off on passing higher prices onto consumers.
“Getting the inflation genie back into the bottle has proven troublesome for the Bank of England. The UK has the highest rate of the G7 economies, and the highest rate in western Europe, but there is now light at the end of the tunnel,” says Rob Morgan, chief investment analyst at Charles Stanley
However, “Despite today’s more encouraging inflation data, irradicating inflation will still take some more time and persistence from the Bank of England. That means households and investors getting used to structurally higher interest rates than they have been used to for much of the past decade,” Morgan continues.
What does this mean for interest rates?
Following today’s inflation reading, the market is no longer expecting the BoE to hike rates to 6.5% in the months ahead.
“Today’s CPI print could mean the BoE chooses to ease off on the dial with a smaller 0.25% increase rather than a previously widely expected 0.5% one at the monetary policy committee’s next meeting on 3rd August,” notes Morgan.
But this doesn’t mean the pain for mortgage holders is over just yet. As Morgan explains, “irradicating inflation will still take some more time and persistence” from the BoE.
He adds, “That means households and investors getting used to structurally higher interest rates than they have been used to for much of the past decade.”
That might not be good news for borrowers, but it could be great news for savers, who’re finally seeing some attractive returns on savings accounts.
Join us at the MoneyWeek Summit on 29.09.2023 at etc.venues St Paul's, London.
Tickets are on sale at www.moneyweeksummit.com
MoneyWeek subscribers receive a 25% discount.
-
Could the AI megacap bubble burst?The business cycle could be moving into territory where megacaps have historically lagged. Could this prompt the bursting of the AI megacap bubble?
-
Top 10 areas with the biggest inheritance tax bills – is your town on the list?People in some of the wealthiest parts of London pay the most inheritance tax – but there are a few areas outside the capital where big bills are paid when a loved one dies
-
Live: Bank of England holds UK interest rates at 4.5%The Bank of England voted to hold UK interest rates at their current level of 4.5% in March, as widely anticipated, after inflation rose to 3% in January
-
Bank of England cuts interest rates to 4.5%: full updates and analysisThe Bank of England voted to reduce the base rate by 25 basis points at the first MPC meeting of the year on 6 February. Full coverage as it happened from the team at MoneyWeek.
-
December interest rates: Bank of England keeps rates on holdThe Bank of England kept interest rates on hold at 4.75% in the final Monetary Policy Committee meeting of 2024. Full analysis from the MoneyWeek team.
-
Bank of England cuts interest rates to 4.75% – MPC meetingReporting from the Monetary Policy Committee November meeting. Full coverage, as it happened, from the team at MoneyWeek.
-
Inflation drops below Bank of England target for first time in over three yearsUK inflation slowed to 1.7% in September, boosting the chance of a more aggressive approach to interest rate cuts from the Bank of England
-
Bank of England holds interest rates at 5%The decision was widely expected, after the Bank of England warned interest rates would have to “remain restrictive for sufficiently long”
-
Keeping up with the Bank of England – how rates and inflation impact your financesIgnorance is not bliss when it comes to your personal finances. Here’s why you should follow what the Bank of England is up to.
-
Bank of England cuts interest rates for first time since 2020The Bank of England voted to end pain for households and businesses today, cutting interest rates for the first time in over four years
