Inflation may be easing more quickly than first thought, the Office for National Statistics has found, providing a boost for Rishi Sunak, who has pledged to halve inflation by the end of the year.
Calculations released on Monday by the statistics office show that the core inflation rate fell to 6.8 per cent in July from 6.9 per cent in June and from a peak of 7.3 per cent in May.
The new modelling indicates that underlying price pressures are easing, raising the chances of the prime minister delivering on his promise to halve the headline rate of inflation to about 5 per cent by the end of the year.
Last week, the ONS said that core consumer prices inflation had held steady at 6.9 per cent in July, surprising analysts and the Bank of England. Headline inflation fell sharply to 6.8 per cent from 7.9 per cent.
James Smith, an economist at ING, the Dutch bank, said the latest analysis was “tentatively good news”. Yael Selfin, chief economist at KPMG UK, said that while the “new measure is pointing at a small ease in inflation, we are still some way from reaching the Bank’s 2 per cent target”.
The statistics office’s one-off inflation estimate, the “common trend component rate”, aims to strip out products whose prices fluctuate frequently to provide a “general underlying trend or core inflation rate across the whole economy”. It tracks how closely individual item prices move in response to changes in prices for other products.
Items that follow general price trends can be used as a yardstick for the overall rate of inflation. It is similar to core inflation, which removes volatile food and energy categories and is regarded as a more accurate measurement of price dynamics in an economy.
Inflation has hit multi-decade highs in the developed world, throwing the spotlight on alternative ways of measuring how quickly prices are rising and how persistent those increases are.
Another measure of inflation published by the ONS, the CPIH, which includes housing costs, tends to be lower than the official consumer prices inflation rate. Core CPIH in July was below the common trend component level at 6.4 per cent.
Core inflation in Europe was unchanged in July at 5.5 per cent, while in the United States it fell to 4.7 per cent.
Restaurant prices over the past decade were the best rule of thumb for the general inflation rate of the British economy, the statistics office said, mainly because they were highly responsive to energy, rent and wage bills. Restaurant prices jumped by about 9 per cent in the year to July.
The Bank watches core inflation more closely than the headline rate to inform its interest rate decisions. Its ratesetting monetary policy committee has emphasised that it needs to see services inflation fall before pausing interest rate rises. This rate jumped to 7.4 per cent in July from 7.2 per cent in June.
Headline consumer prices inflation is expected to fall to about 5 per cent by the end of the year.