UK Inflation Rate Decreases in June

Summary

The inflation rate in the UK showed a larger decline than anticipated in June, with the core rate also falling. This provides some relief for the Bank of England (BOE) policymakers as they determine their response to persistently high price pressures at their upcoming August meeting.

Inflation Rate Details

According to the Office for National Statistics, consumer prices in June were 7.9% higher compared to the same month the previous year. This represents a slowdown from the 8.7% increase recorded in May. Economists surveyed by The Wall Street Journal had predicted that inflation would decline to 8.1%.

Core Inflation

Core inflation, which excludes the volatile categories of food and energy and is closely monitored by the BOE, was at 6.9% in June. This is lower than expectations, as economists had anticipated that it would remain at May's rate of 7.1%. This marks the first decline in core inflation since January.

Factors Driving the Decline

The decrease in the inflation index was primarily driven by a significant drop in motor fuel prices, which fell by 22.7% in the year leading up to June. Additionally, food inflation also eased to 17.3% on-year in June, down from 18.7% in May, according to the ONS.

Other Sectors

June saw a cooling off of annual price increases in various sectors such as health, housing, household equipment, as well as restaurants and hotels when compared to May.

These new inflation figures will play a crucial role in guiding the BOE's next steps in managing the country's monetary policy.

Inflation Rate in UK Remains Above Target

Despite the latest inflation reading coming in below expectations, the rate still exceeds the Bank of England's (BOE) target of 2%. For this reason, investors anticipate the central bank will continue its streak of raising rates at its upcoming meeting on Aug. 3. At this point, opinions are divided among investors regarding whether the increase will be 25 or 50 basis points.

In June, the BOE surprised markets by raising the current key bank rate by a higher-than-expected half percentage point to 5%, following higher-than-forecasted inflation data for May.

Nonetheless, the BOE is optimistic that inflation will decrease significantly throughout the remainder of 2023. This prediction is based on the expectation that energy prices will decline and supply bottlenecks will continue to ease.

However, it's important to note that inflation in the UK remains higher than that of several comparable nations. According to the European Union's harmonized measures for June, Germany's inflation stood at 6.8%, France at 5.3%, Italy at 6.7%, and Spain at 1.6%. Meanwhile, the eurozone as a whole experienced inflation of 5.5% in June, down from 6.1% in May. The United States recorded an inflation rate of 3.0%.