The joint second largest fall in inflation since the start of the century in June – exceeding market expectations – will ease the pressure on further interest rate rises, and has ended the UK’s 18-month period of falling real wages, according to the Resolution Foundation.
CPI inflation fell from 8.7 per cent in May to 7.9 per cent in June – a chunky 0.8 percentage point fall that is the joint second biggest monthly fall this century (alongside 0.8 ppt falls in December 2008 and August 2020, and the 1.4 ppt fall this April). Inflation has fallen to its lowest level since March 2022.
The scale of the fall means that inflation is now back in line with the Bank of England’s expectations published in its Monetary Policy Report in May. This should ease the pressure to keep raising interest rates, and to keep them higher for longer, says the Foundation. Sterling is already down in anticipation of changing market expectations.
The ONS’ preferred inflation measure CPIH also fell sharply to 7.3 per cent. With typical employee pay rising by 8.5 per cent in the three months to June, according to the ONS RTI data, this means that the UK’s latest 18-month period of falling real wages is over, though there is plenty of lost ground to make up.
Looking beneath the headline rates, there is further good news for the Bank with both core inflation and services price inflation falling (to 6.9 and 7.4 per cent respectively). These measures are critical to assessing the state of domestically driven inflation.
With significant inflation falls now coming through, the UK is less of an outlier in the battle to tame inflation, but its level remains significantly higher than other advanced economies. The UK still has the highest inflation rate in the G7, and the third highest among OECD advanced countries, with only Austria and Iceland having higher inflation in June.
Looking over a longer period, the UK has experienced the second largest rise in price levels since June 2019 among OECD advanced economies at 22 per cent, behind only Iceland (at 26 per cent).
James Smith, Research Director at the Resolution Foundation, said “Today’s chunky inflation rate fall – the joint second largest this century – offers some unambiguously good news after months of disappointing data on the state of the economy.”
“The scale of the fall will ease pressure on mortgages and wages, with the Bank of England less likely to keep interest rates higher for longer, and Britain’s latest 18-month pay squeeze coming to an end.”
“The UK still has one of the highest inflation rates of any advanced economy, but after today it merely looks bad rather than a basket case. That is a very welcome improvement.”