- Economists polled by Reuters had expected an annual rise in the core consumer price index of 8.2%, after the higher-than-expected reading of 8.7% for May.
- Core inflation — which excludes volatile energy, food, alcohol and tobacco prices — held steady at 6.9% annually, but declined from a 31-year high of 7.1% in May.
Skyline view of the City of London financial district.
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LONDON – UK inflation eased significantly in June, coming in below forecasts of 7.9% y/y.
Economists polled by Reuters had expected an annual rise in the core consumer price index of 8.2%, after a hotter-than-expected reading in May of 8.7%, but annual price increases still beat the Bank of England’s 2% target.
On a monthly basis, the core CPI increased by 0.1%.And Less than the consensus forecast of 0.4%. Core inflation — which excludes volatile energy, food, alcohol and tobacco prices — held steady at 6.9% annually, but declined from a 31-year high of 7.1% in May.
The Office for National Statistics said Wednesday that the decline in motor fuel prices contributed to the largest decline in the monthly change in the annual average of the consumer price index. Food prices rose in June, but by less than the same period last year.
“There were no significant contributions offsetting the increase in the rate change,” the office added.
The pound was down 0.6% against the dollar on Wednesday, hovering around $1,296 as of 7:50am London time.
Chief Treasurer John Glenn told CNBC on Wednesday that the larger-than-expected drop in the inflation rate was “very encouraging.”
“But there is no complacency here at the Treasury,” he added. “We are working closely with the Bank of England as we try to halve it this year and bring it down to the long-term benchmark of 2%.”
The UK has suffered from persistently high inflation, which both the government and the Bank of England warn could become entrenched in the economy, due to a cost-of-living crisis and rising wage prices in a tight labor market.
Bank of England Governor Andrew Bailey and British Finance Minister Jeremy Hunt told an audience in the City of London earlier this month that higher wage settlements were hurting their efforts to contain inflation.
The Organization for Economic Co-operation and Development predicted last month that the UK would experience the highest level of inflation of all advanced economies this year, at a headline annual rate of 6.9%.
The Bank of England carried out a massive 50 basis point increase in interest rates last month, the 13th in a row, as the Monetary Policy Committee struggles to crush demand and rein in inflation.
After the UK base rate fell from 0.1% to 5% over the past 20 months, markets are pricing in another sharp half-point hike to 5.5% at the August MPC meeting.
ray of light
Although energy and fuel prices are taking headline inflation in the “right direction,” stubbornly high core inflation and food costs mean Wednesday’s print is unlikely to offer any “real relief to struggling households and businesses,” said Suren Theroux, director of economics at the institute. “. Chartered Accountants in England and Wales.
“A fall in inflation in June should be followed by a significant drop in July as energy bills fall – after Ofgem’s energy rate cap cut – and this is likely to bring the key rate down below 7%,” Theroux said in a statement.
He added that core inflation should continue in a downward trend, as the late effects of BoE monetary policy tightening and government tax increases pressure demand. However, he warned that this would come “at the cost of a significantly weaker economy and higher unemployment rates”.
“While interest rates will likely rise again in August, too much focus on current inflation data for rate setting could lead to harmful policy mistakes given the long lag between rate hikes and their impact on the broader economy,” Theroux said.
Marcus Brooks, chief investment officer at Quilter Investors, said the drop in CPI was a “glimmer of light”, but “still leaves us wondering again why the UK is so steep” among the major economies when it comes to inflation.
“Demand has withstood both inflation and rate hikes, but cracks are emerging, and with more mortgage holders exposed to current rates, the economy is likely to take a hit as a result.”
Brooks noted that this path to a possible recession next year may be necessary in order to get inflation back on target, with the Bank of England raising interest rates further and with the prospect of fiscal tightening, as the government faces elections in 2024.
He added, “It is assumed that inflation will start to decline to more acceptable levels soon, but as we have seen, these expectations are unpredictable.”
“For investors, this means seeking shelter in quality companies that can handle this challenging environment, while also considering UK fixed income investments, such as gold bonds, as they are looking at attractive rates right now as we approach an economic period. Difficult.”
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