Credit, Collections & Insolvency News
UK inflation held at two per cent in the year to June, unchanged from May, mostly driven by a rise in hotel and restaurant prices and a fall in clothing and shoes, according to the latest figures from the Office for National Statistics (ONS)
Core inflation, which excludes the price of fuel and food, remained at 3.5%. Inflation in the services sector, an area closely watched by the Bank of England, remained steady at 5.7%. With inflation not coming down from May’s reading, analysts say an August interest rate cut is now less likely. Financial markets reduced their forecasts for the likelihood of an August cut from a 50% to 35%.
Commenting on today’s June inflation data, ONS Chief Economist Grant Fitzner said “The inflation rate was unchanged in June. Hotel prices rose strongly while second-hand car costs fell but by less than this time last year. However, these were offset by falling clothing prices, with widespread sales driving down their cost.
“Meanwhile, the cost of both raw materials and goods leaving factories fell on the month, though factory gate prices remain above where they were a year ago.”
Anna Leach, Chief Economist at the Institute of Directors, said “The Bank will be relieved that headline inflation has remained at target in June in line with their expectations. That relief will be tempered though by services inflation holding at 5.7%, well above their expectations.
“Stickiness in services inflation – a key measure of domestic inflationary pressures – lowers the likelihood of an August rate reduction. All eyes will be on tomorrow’s wage data to see whether it will spur a summer rate cut by the MPC.
“Inflation is likely to rise slightly in the coming months, as energy price inflation picks up reinforcing sticky services inflation. But all being well, inflation should moderate further out, supporting a downward trend in interest rates.”
James Burgess, Head of Commercial and insolvency expert at Atradius, said “The days of high inflation appear to be receding into the distance, with the CPI reading on target for a second month. However, it’s too early to say that inflation is set to be sustainably lower. And we know that consumers and businesses are still finding life difficult, and many costs remain prohibitively high.
“All eyes are now on the Bank of England, with its August decision on interest rates hanging in the balance. Many businesses and mortgage holders will be hoping for a cut to rates for the first time since the Covid pandemic, but they might have to wait a little longer.
“Business and economic conditions are looking up though. We’ve seen an increase in business confidence – something that should hopefully continue to improve now the uncertainty of the General Election is behind us.
“In addition, our data confirms that less firms made claims for late or failed payments in June compared to May. Claims have rapidly declined in sectors such as finance (-87%), consumer durables (-42%), and construction (-32%).
“However, business insolvencies are still high, and it remains crucial that firms are vigilant and protect themselves with proactive financial planning. This includes increasing liquidity, diversifying supply chains, and protecting vulnerable credit agreements with insurance.”
Martin Sartorius, Principal Economist, CBI, said “The fact that inflation is stable at the Bank of England’s target will be welcome news for many households as we start to see things return to normal after period of high price growth. However, it’s worth noting that many have yet to feel the benefit of lower inflation due to the high level of prices, particularly for food and energy bills.
“Today’s data paves the way for an interest rate cut next month, which would begin to provide some relief for firms and households that are struggling with high borrowing costs.
“Going forward, the Bank’s Monetary Policy Committee will be mindful of potential upside risks to inflation in the near-term as the domestic growth outlook improves. They are also likely to move carefully as they assess the impact of the first rate cut in four years.”
Suren Thiru, Economics Director at ICAEW said “While these figures provide further reassurance that the UK’s inflation crisis is in the rear-view mirror, uncomfortably high services inflation suggests that its damaging after-effects are still being felt. Though it may slow in July, following the fall in Ofgem’s energy price cap, inflation is likely to drift moderately higher, thereafter, fuelled by stronger demand from a faster growing economy and low labour supply.
“Sticky services inflation will cause considerable unease at the Bank of England because it suggests that underlying price pressures are frustratingly persistent and leaves the UK more vulnerable to the impact of future price shocks.
“While anxiety over underlying price pressures keeps the prospect of an August interest rate cut on a knife edge, these figures should at the very least drive a more dovish vote split to signal that rate cuts are imminent.”
