Inflation in the UK has fallen lower than expected even as authorities promise to keep working towards their goal of 2%.
The UK might be making some progress in stemming the rise of inflation as the country’s rate came in at 7.9% annually in June, lower than expected. Although Reuters projected a reduction in the headline consumer price index from 8.7% to 8.2% according to polled economists, inflation came in lower.
Core inflation also fell to 6.9% from May’s 31-year high of 7.1%. Core inflation excludes food, volatile energy, alcohol, and tobacco.
Although June saw an increase in food prices, the rise was less than recorded in June last year. The price of motor fuel also fell, joining food prices as major contributors to the drop in the annual CPI rate.
Speaking to CNBC on Wednesday, the Chief Secretary to the Treasury John Glen described the drop in inflation as encouraging. However, Glen believes there is still a lot to be done. He said:
“There’s no complacency here in the Treasury. We’re working closely in lockstep with the Bank of England as we try to halve it this year and get it down to its long term norm of 2%.”
An economics director at the Institute of Chartered Accountants in England and Wales believes that inflation may fall lower in July. According to Suren Thiru, since the UK’s Office of Gas and Electricity Markets (OFGEM) lowered its energy price cap, reduced energy bills could tank the headline figure further. Thiru believes it may fall below 7%.
In addition, Thiru predicts that core inflation will also fall. However, he says that the high levels of core inflation and food prices still pose a problem for the average business or household. Thiru also warned that the Bank of England (BoE) paying too much attention to interest rates may be problematic:
“While interest rates will probably rise again in August, focusing too much on current inflation data to set rates can lead to damaging policy mistakes given the long time lag between rate rises and their effect on the wider economy.”
Banking giant JPMorgan Chase & Co (NYSE: JPM) has also warned of potential economic decline in the UK. The bank said it expects the BoE’s interest rates to continue and peak at 5.75% in November. However, JPMorgan cautioned that rates could hit 7% under some specific circumstances.
Biting Inflation in the UK
Like a few other countries, the UK has been battling rising inflation for a while. In March, inflation was over 10%, higher than predicted by a Reuters poll of economists. However, it fell under 10% in April, with electricity and gas prices contributing to the fall.
Last November, inflation in the UK rose to 11.1%, the highest level in 41 years, according to data from the Office for National Statistics (ONS). At the time, the ONS stated that households were paying 88.9% more for gas, electricity, and other fuels, than they paid the year before.
According to recent data from the Organization for Economic Cooperation and Development (OECD), the UK is the only G7 country with rising inflation. The organization stated that between April and May, inflation among G7 countries generally dropped from 5.6% to 4.6%