Why it matters: Inflation is still stubbornly high.
Overall inflation numbers have fallen, but policymakers are closely monitoring other measures of price pressures that indicate how deeply embedded inflation is in the UK economy. Price increases in the services sector and rising wage growth are signals of continued inflation and one of the reasons why the central bank has raised interest rates to the highest level since 2008.
In June, some of these price pressures eased, with inflation in the services sector slowing slightly to 7.2 percent and core inflation falling for the first time since January.
Wednesday’s data was “a rare and welcome downside surprise,” said Andrew Goodwin, an economist at Oxford Economics. But he cautioned that some of the reasons for the slowdown came from pricing categories that can be volatile, including furniture prices.
“I don’t think this release is a game changer,” added Mr. Goodwin to it. “Essentially, wage growth and services inflation are too high.”
High prices have been eating into household budgets for a year and a half. In January, the government promised to halve inflation by the end of this year, which would mean a drop to 5.2 percent.
Inflation is expected to slow significantly in the second half of this year, when the impact of last year’s energy price hikes will no longer impact annual calculations, and consumers will begin to see the benefits of falling production costs for manufacturers .
But the pace of this slowdown has become another source of uncertainty. Inflation numbers have been surprisingly high in recent months and the Bank of England has tightened its warnings that inflation is more stubborn than officials had expected.
Background: A tight labor market is fueling inflationary pressures.
Fulfilling the government’s commitment will not solve the UK’s inflation problem. The central bank has a mandate to ensure price stability, which is measured as an inflation rate of 2 percent.
Like its neighbors in Europe, inflation in Britain was driven up last year by rising energy prices. But as wholesale prices have fallen this year, the benefit is slow to reach UK households, partly because energy price caps are set quarterly by a government regulator.
This partly explains the relatively high inflation in Britain – which is higher than in Western Europe and twice as high as in the United States – but there are other reasons why inflationary pressures are high in Britain.
Britain still has more people out of work than before the pandemic, unemployment is low and job vacancies are high. Employers raise wages to attract and retain workers. While most of these wage increases have failed to keep pace with inflation, wage growth threatens to become a stubborn source of higher prices as companies pass on higher labor costs.
Private sector wages rose 7.1 percent in the three months through May from a year earlier, a record high outside of the pandemic as furlough skewed the data.
What’s Next: The central bank is expected to raise interest rates.
The Bank of England raised its interest rate for the 13th time last month, from 0.1 percent at the end of 2021 to 5 percent. But investors expect rates to move higher when policymakers meet again in early August.
“Inflation is unacceptably high,” Andrew Bailey, the bank’s governor, said last week. He added that the current pace of price and wage increases was inconsistent with meeting the bank’s inflation target of 2 percent.
Mr Bailey and the government have said the pain of higher interest rates is less than the pain of continued high inflation, but any increase in interest rates is another blow to mortgage holders who need to extend the terms of their fixed rate loans.
Many mortgage rates jump above 6 percent, from below 2 percent. By the end of this year, around three million mortgage holders will experience increases of up to £500 a month on their repayments, the Bank of England estimates.