Economists surveyed by Reuters anticipated the annual rate for the headline consumer price index (CPI) to be 8.2%, which was up from the 8.7% reading reported in May. Core inflation, not taking into account the variation of energy, food, alcoholic beverages, and tobacco prices, held steady annually at 6.9%, though this was less than the 31-year peak of 7.1% in May.
Inflation in the U.K. cooled significantly in June to the surprise of economists, registering an annualized figure of 7.9%, far below the 8.2% consensus figure. This is still a substantial distance away from the Bank of England's 2% target. Prices on a monthly basis increased 0.1%, against a consensus forecast of 0.4%. Core inflation of 6.9% for the year was lower than the 31-year high of 7.1% registered in May. Motor fuel prices were the largest contributors to the decline in annualized inflation. Food prices rose in June, although not as much as in the same period of last year.
John Glen, Chief Secretary to the Treasury, commented on the larger-than-expected decline in inflation, calling it "very encouraging." He stressed, however, that the Treasury was taking no chances and working closely with the Bank of England to "halve it this year" and reach its long-term goal of 2%. Sterling dropped 0.6% against the dollar, trading at around $1.296 at 7:50 a.m. London time.
The U.K. has seen persistently high inflation that both the government and the Bank of England have warned could become entrenched in the economy, due largely to a cost-of-living crisis and a tight labor market driving wage price increases. Governor Andrew Bailey and Finance Minister Jeremy Hunt told an audience in the City of London recently that high wage settlements were undermining their attempts to bring inflation under control. The Organization for Economic Cooperation and Development have forecast the U.K. to have the highest rate of inflation amongst all advanced economies this year, with a projected annual headline rate of 6.9%. The Bank of England took the dramatic step of raising interest rates by 50 basis points last month, the thirteenth consecutive rise, as the Monetary Policy Committee (MPC) endeavors to curb demand and contain inflation. After the U.K. base rate was increased from 0.1% to 5% over the past 20 months, markets are now predicting another forceful half-point hike to 5.5% at the MPC's August meeting.
A 'glimmer of hope'
Though fuel and energy prices have been pushing headline inflation in a more positive direction, the Bank of England will have to continue to raise rates as core inflation and food costs remain high. The Institute of Chartered Accountants in England and Wales' Economics Director Suren Thiru stated that June's decrease in inflation should be followed by a sizable decrease in July with lower energy bills - after the decrease in 'Ofgem's' energy price cap - likely to take the headline rate down below 7%. Core inflation is also expected to drift downwards as the Bank of England's monetary policy tightening and the government's tax rises stifle demand, although this will come at the cost of a weakened economy and higher unemployment.
Marcus Brookes, Chief Investment Officer at Quilter Investors, remarked that the decline in CPI represents a "glimmer of light," yet the U.K. still remains an outlier when it comes to inflation compared to other major economies. Brookes pointed out that despite inflation and rising rates, demand has so far held up, but this will likely change as more mortgage holders are affected by the current rates. He added that this path to a potential recession next year may be necessary to get inflation back to target, however the Bank of England may raise rates further and fiscal tightening is unlikely due to the eminent 2024 election. Brookes commented that investors should seek refuge in quality companies that can navigate this difficult environment, and also consider U.K. fixed income investments such as gilts as they look attractive right now.
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