Gas and electricity prices fell sharply in the UK in July, but price pressures at the base did not fall as predicted. This kept pressure on Bank of England to maintain high interest rates.
Published on Tuesday by the Office for National Statistics showed that consumer prices in July were 6.8 percent higher than they had been a year ago. This was compared to an increase of 7.9 percent in June. The Office for National Statistics reported that consumer prices were 6.8% higher in July than a year earlier, compared to a 7.9% increase a month before.
The headline figure was in line with economists’ predictions and should provide some relief following Tuesday’s wage data, which were surprisingly high. The details, however, suggested that Britain has not yet made any progress in tackling its inflation issue.
After excluding food and energy, core prices increased at the same annual rate in July, 6.9 percent. Services prices also rose faster, increasing pressure on BoE to maintain a tight monetary policy to restore price stability.
This month , the central bank’s Monetary Policy Committee increased interest rates by 0.25 percent . The rate now stands at 5.25 percent, a record high for 15 years. The markets expect the panel to increase interest rates for a 15th time in a row when it meets in September.
Suren Thiru is the economics director of the ICAEW, the accountancy trade association. He said that although these figures provide reassurance about the turn in the inflation tide, this latest fall is more due to lower energy prices, following the reduction of Ofgem’s energy price caps, than a broader easing price pressures.
Gas and electricity prices fell by 15 percent in July due to the lower cap on quarterly energy prices. This contributed to a 0.4 percent overall drop in prices when compared to June.
The food prices stabilized in July. They rose only 0.1% in the month, bringing down the annual rate of inflation in the food price from 17.3% to 14.9%.
The market reaction was muted. The yields of gilts barely moved, but sterling edged up to $1.274 per dollar. Mortgage rates are unlikely to change due to the little movement on the bond market.
The signs of a continuing price pressure in other areas offset the improvement in energy and food. The annual inflation rate remained constant at 6.9%, not dropping as expected to 6.8%.
The BoE’s worst news was the fact that the services price index, which officials consider the best indicator of domestic inflation, increased by 0.8% in July. The rate of annual services inflation jumped from 7.4% in July to 7.24% in June, which is the highest since March 1992.
Economists warned that this was likely to worry policymakers, as it indicated the rapid pace of price increases was more of a domestic issue than the inevitable result of higher wholesale costs for gas and electricity.
Paula Bejarano Carbo is an associate economist with the National Institute of Economic and Social Research. She said that “we have not yet seen a turning point” in the inflation rate, which has remained stagnant, at about 7 percent.
Ruth Gregory, Deputy Chief UK Economist at Capital Economics said: “Wage growth and service inflation were both stronger than expected by the bank. It seems that the bank still has work to do.”
Jeremy Hunt, the chancellor of the United Kingdom, praised the drop in headline inflation of 6.8 percent as a sign of progress toward the government’s commitment to halve inflation this year.
He did note that there was still more work to be done. “We are not yet at the finish line. “We must stick to our plan of halving inflation this year, and getting it back to the 2% target as quickly as possible,” said he in a press release.
Some economists doubt the possibility that Rishi Sunak will meet his price promise, as it would mean the inflation rate for the fourth quarter in 2023 must fall to at least 5.3 percent.
Think-tank Institute for Fiscal Studies said that it was not a foregone decision that the Prime Minister would reach his target, because the majority of improvements in energy costs and food prices had already occurred and there was still progress to be made on reducing price increases elsewhere.
Heidi Karjalainen is an IFS research economist. She said that the progress made was mainly because commodity and energy prices have not increased at the same rate as they did last year. The problem is that core inflation continues to be stubbornly high and higher than expected at the beginning of the year.
Sunak has welcomed the decline in inflation, as it is a sign that the government’s plan is working. He told ITV pay rises should be “sustainable” as well as “focused on rewarding productivity gains” following data released on Tuesday showing UK wage growth at a record 7.8 percent in the three-month period ending June.
Prime Minister also admitted that state pensions could increase by this amount in the next year. He reiterated his commitment to triple lock which states that state pensions are increased by the highest three metrics, namely earnings growth, inflation, or 2.5%.
He said that it was “right” to help the people deal with the pressures of inflation.