- Headline inflation rate drops to 7.9 per cent
- Gap between US and UK inflation rates grows historically large
Annual inflation has fallen further than expected to 7.9 per cent in the UK. The figure was better than forecasts of 8.2 per cent, but there is still a historically large gap between US and UK inflation rates.
Core inflation, which strips out more volatile food and energy prices, dipped to 6.9 per cent, down from 7.1 per cent last month. Services inflation, which the Bank of England is monitoring closely as an indicator of ‘persistent inflationary pressure’ fell to 7.2 per cent, from 7.4 per cent last month.
The high reading leaves the UK something of an outlier among major advanced economies. In the US, inflation has fallen to a two-year low of 3 per cent, down from a peak of 9.1 per cent in June last year. In the Eurozone, inflation has dropped from a peak of 10.6 per cent in October to 5.5 per cent today. In Spain, the annual rate of inflation has even fallen to 1.6 per cent – undershooting the European Central Bank’s 2 per cent inflation target.
Though this week’s UK headline figure marks a decline on the 11.1 per cent peak reached in October, inflation remains stubbornly above the Bank of England’s 2 per cent target. Economists at wealth manager Investec said that they “suspect markets view the UK as among the developed economies with the most entrenched inflation problems”, as a result.
A range of factors have been cited as a reason for the UK’s ‘inflation gap’, including wage pressures, higher energy costs and fixed rate mortgage deals, which have so far cushioned the impact of interest rate hikes. Some economists have also voiced concerns about the inflationary impacts of the 5-7 per cent pay rises announced for public sector workers last week.
Following the announcement, Katharine Neiss, chief European economist at PGIM Fixed Income, said that “the recent agreement on public sector wages will likely translate into stubbornly high inflation”. She added that “the Bank of England will remain focused on tightening credit conditions to cool the economy and bring inflation back to target”.
The BoE took markets by surprise last month when it increased interest rates by a greater-than-expected 0.5 percentage points. The Bank of England’s monetary policy committee meets again on 3 August, and a further hike is widely expected. Immediately following the release, market pricing indicated that interest rates would peak at just under 6 per cent cent later this year.
Jeremy Batstone-Carr, European strategist at Raymond James, called today's figures a "step in the right direction". He added: "But high wage growth and stubborn underlying prices show there is still a long journey ahead to drag inflation back down into more stable territory."
