UK inflation dropped to a 15-month low of 7.9% in the year to June, easing concerns for Bank of England (BoE) policymakers who are battling against runaway prices.
It is the lowest reading since March 2022. Economists predicted that the rate would dip to 8.2% from 8.7% in both April and May.
New figures from the Office for National Statistics (ONS) on Wednesday showed that an ease in food price inflation and also falling prices for motor fuel helped to push the rate down.
The largest downward contribution came from the milk, cheese and eggs category, with the annual rate easing to 22.8%, from 27.4% in May. Motor fuel prices fell by 22.7% in the period, compared with a fall of 13.1% the month prior.
Core CPI, which excludes energy, food, alcohol and tobacco, rose by 6.9% in the 12 months to June 2023, down from 7.1% in May. Economists had expected core inflation would stick at 7.1%.
“Although costs facing manufacturers remain elevated, especially for construction materials and food items, the pace of growth has fallen across the last year with the overall cost of raw materials falling for the first time since late 2020,” Grant Fitzner, chief economist at the ONS, said.
However, despite the decline, inflation still remains persistently high and stands above the Bank of England’s 2% target. Threadneedle Street has so far hiked UK interest rates 13 consecutive times as it looks to combat high inflation.
Paula Bejarano Carbo, associate economist at NIESR, said: “Though these are all welcome falls, it remains concerning that these measures of underlying inflationary pressures continue to plateau around 7%, well above the Bank of England’s target of 2%.”
Meanwhile, Paul Dales, chief economist at Capital Economics, said: “Overall, the UK will probably still have higher rates of inflation than elsewhere for a while yet, but at least the UK is now following the global trend. Our forecast is that core and services CPI inflation will both ease gradually as the effects of the previous rises in interest rates are felt,”
Chancellor Jeremy Hunt said: “Inflation is falling and stands at its lowest level since last March; but we aren’t complacent and know that high prices are still a huge worry for families and businesses.
“The best and only way we can ease this pressure and get our economy growing again is by sticking to the plan to halve inflation this year.”
The pound (GBPUSD=X) retreated back towards $1.29 on the back of the news, down from $1.3034 last night, as traders cut bets on the peak for interest rates.
Markets are now forecasting a peak of 6% in March next year, having previously expected a peak of 6.25% before the figures were released this morning.
But the Bank is still likely to increase interest rates again at its next meeting in August, with a rise of a quarter-point or even a half-point expected, taking the base cost of borrowing up from 5%.
Marcus Brookes, chief investment officer at Quilter Investors, said: “While it is a nice surprise to beat expectations, it still leaves us wondering once again why the UK is such a drastic outlier compared to other developed economies when it comes to inflation.
While the rate of the price rises has dropped to 7.9%, this is still far above where the Bank of England wants it to be before it can even consider a pause in the rate hikes we have become accustomed to.