Inflation relief means Rishi Sunak’s goals no longer seem so elusive

Rishi Sunak and Jeremy Hunt will heave a big sigh of relief at the latest inflation figures. It is too early to say that Britain’s cost-of-living crisis is over, but the prime minister and chancellor are hoping that the sharp drop in the annual rate of price increases in June will be a turning point.

At first glance, there isn’t much to brag about. At 7.9%, the annual increase in the cost of living as measured by the consumer price index is still four times above the government’s 2% target.

But for the first time since January, inflation has been below the level expected by the financial markets. That applies to headline inflation and core inflation, the measure that excludes volatile items like food and fuel, and which dropped from 7.1% to 6.9% in June. The City had thought that headline inflation would fall to 8.2% and that core inflation would remain unchanged.

Inflation in the service sector also fell last month, from 7.4% to 7.2%. That’s important not only because services account for roughly four-fifths of the economy’s total output, but also because economists see what’s happening to the price of services as a guide to the inflation generated by the national economy.

inflation graph

Other good news for the government is that producer price inflation, a guide to price pressures early in the process, is moving in the right direction. The cost of fuel and raw materials fell 2.7% in the year to June, while the cost of goods leaving factories rose just 0.1%.

Earlier in the year, Sunak halved inflation, then over 10%, one of his five promises to the public: the latest data from the Office for National Statistics indicates the prime minister may be close to fulfilling his promise .

There are a few other conclusions that can be drawn from all of this. First, inflation is now on a clear downward trend, although not as rapidly as in other countries. The inflation rate in Spain, for example, is below 2%. The ONS says there are reasons why UK inflation has been slower to respond to lower global energy prices: the timing of big increases in energy bills last year and the trend of British supermarkets to close longer-term contracts with food suppliers than their counterparts elsewhere in Europe.

Second, the fall in the inflation rate does not mean that prices are falling, just that they are rising at a slower rate. Household budgets are still under pressure, with the cost of food rising more than 17% last year. Furthermore, inflation in the services sector may be more difficult to move than in the goods sector.

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Finally, the fall in inflation is not going to be enough to stop the Bank of England from raising interest rates again next month, but it makes it more likely that the Threadneedle Street monetary policy committee will opt for a quarter of a point. instead of half a point. point increase and that official borrowing costs are closer to a peak.

If the bank hits the pause button at 5.5%, instead of the 6.5% some previously feared, that will mean cheaper mortgages and a boost to the housing market.

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