UK inflation has slowed to its lowest level in 17 months thanks to falling gas and electricity bills.
The Consumer Prices Index (CPI) rose by 6.8% in the year to July, down from 7.9% in June, according to the Office for National Statistics (ONS).
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This is lower than its peak of 11.1% set last October, but well above the Bank of England’s (BoEs) target of 2%.
With inflation still more than three times the BoE’s 2% target, many experts expect the central bank to raise interest rates again in September as it continues to battle UK inflation.
Money markets are suggesting the BoE will announce another 0.25% hike in September, taking its base interest rate to 5.5%, before yet another move higher to 6% by the end of the year.
The BoE has now hiked the cost of borrowing 14 consecutive times to 5.25%, over a period of more than 18 months.
The key drivers of UK inflation
The lower quarterly energy price cap led to a 15% fall in gas and electricity prices in July, which contributed to an overall 0.4% drop in prices compared with last month.
"Prices of gas fell by 25.2% between June and July this year, but rose by 0.1% between the same two months a year ago," the ONS says. "Prices of electricity fell by 8.6% between June and July this year but rose by 0.4% between the same two months a year ago."
At the same time, the cost of services rose to a 30-year record of 7.4% - the highest rate since March 1992.
Meanwhile, food and non-alcoholic beverage prices rose by 0.1% between June and July 2023, compared with a rise of 2.3% between the same two months a year ago. That pulled the annual rate of inflation for food and non-alcoholic beverages to 14.8% in July, down from 17.3% in the year to June.
The retail price index (RPI), which is no longer an official statistic but is used to calculate increases in a range of consumer bills, increased by 9% in the year to July.
Chancellor Jeremy Hunt said: "The decisive action we’ve taken to tackle inflation is working, and the rate now stands at its lowest level since February last year. But while price rises are slowing, 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% target as soon as possible.”
Core inflation stubbornly high
Core inflation - which strips out energy, food, alcohol and tobacco - remained at 6.9% in July, which is likely to be of concern to the BoE.
Oliver Blackbourn, multi-asset portfolio manager at Janus Henderson Investors, warns that core inflation “remains stubbornly high”,
“This presents a headache for the BoE as it will want to see this less volatile measure decline to suggest that cost pressures are sustainably returning to target,” he says.
“Core inflation suggests a stickier underlying inflation dynamic as services cost growth continued to accelerate,” he adds.
Ruth Gregory, deputy chief UK economist at Capital Economics, says with wage growth and services inflation both stronger than the BoE had expected, its decision makers would look to raise rates from 5.25% to 5.5% in September.
The figures were released a day after data showed wages are growing at the fastest pace since records began. Total pay grew by 8.2% in the three months to June compared with a year earlier, according to the ONS, while regular pay rose 7.8%.
The Institute for Public Policy Research (IPPR) warns that although inflation has fallen, the UK now faces a high risk of recession.
“It’s good news that headline inflation is lower, especially with energy bills coming down, but there is a very real risk that a recession may soon overtake price rises as the main economic concern,” says George Dibb, head of IPPR’s Centre for Economic Justice.
Paula Bejarano Carbo, an associate economist at the National Institute of Economic and Social Research, says: “We have yet to see a turning point in the underlying rate of inflation, which remains stagnant at around 7%.”
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