UK inflation slows to 6.8% in July on lower energy pricesLower gas and electricity costs drove a sharp drop in headline UK inflation in July but underlying price pressures failed to fall as expected, maintaining pressure on the Bank of England to keep interest rates high.
Consumer prices were 6.8 per cent higher in July than a year earlier, with the rate of increase down from 7.9 per cent the previous month, according to data published on Wednesday by the Office for National Statistics. This drop resulted in the lowest inflation rate since February last year.
The headline figure met economists’ expectations and will come as modest relief after wage data on Tuesday was surprisingly strong. But the details suggested Britain had not made progress in solving its inflation problem.
Stripping out food and energy prices, core inflation rose at an unchanged annual rate of 6.9 per cent in July and services prices increased at a faster pace, maintaining pressure on the BoE to keep monetary policy tight in order to restore price stability.
The central bank’s Monetary Policy Committee this month raised interest rates by 0.25 percentage points to a 15-year high of 5.25 per cent. Markets expect a 15th consecutive increase when the nine-member panel meets in September.
Suren Thiru, economics director at the ICAEW accountancy trade body, said: “Although these figures provide reassurance that the inflation tide has turned, this latest drop owes more to lower energy bills, following the reduction in Ofgem’s energy price cap, than to a broader easing of price pressures.”
The lower quarterly energy price cap led to a 15 per cent fall in gas and electricity prices in July, which contributed to an overall 0.4 per cent drop in prices compared with June.
Food prices stabilised in July, rising only 0.1 per cent in the month and bringing the annual rate of food price inflation down from 17.3 per cent to 14.9 per cent.
Market reaction to the data was muted, as it was close to expectations. Sterling edged higher to $1.274 against the dollar, with the yields on gilts barely moving in morning trading. With little movement in the bond markets, the figures are unlikely to move mortgage rates.
But the improvements in energy and food prices were offset by signs that there was no moderation in pricing pressures in most other areas.
Prices of core goods rose 0.3 per cent over the month, with the annual inflation rate remaining constant at 6.9 per cent rather than dropping to 6.8 per cent, as economists expected.
Worse news for the BoE was that services prices, which officials see as the best indicator of underlying domestic inflation, rose 0.8 per cent in July. The annual rate of services inflation increased from 7.2 per cent in June to 7.4 per cent in July, the highest rate since March 1992.
Economists said this would worry policymakers because it showed the fast pace of price rises was a more entrenched domestic problem, rather than the unavoidable consequence of higher wholesale gas and electricity costs.
Paula Bejarano Carbo, associate economist at the National Institute of Economic and Social Research, said: “We have yet to see a turning point in the underlying rate of inflation, which remains stagnant at around 7 per cent.”