The PM can be forgiven for being a bit bouncy today.
At the start of the year, Rishi Sunak laid out five “urgent priorities” after a tumultuous 2022. halved inflation.
When he made the promise, prices rose by 10.1%, which means that by December they must reach 5% to fulfill the promise.
Since then, the Prime Minister has been nervous month after month as inflation has remained consistently high and repeatedly exceeded forecasts.
Even though price pressures in the US and parts of Europe quickly eased, the UK figure looked terribly sticky.
In the end, however, inflation quickly declined. According to the Office for National Statistics, consumer prices rose 7.9% in June compared to the same period last year. This is certainly a very high rate by historical standards and almost four times the Bank of England's target of 2 percent. But that represents a sharp drop from 8.7% in May and well below economists' expectations.
Callum Pickering, an economist at Berenberg Bank, says that if current patterns continue, “inflation should fall rapidly in the coming months to around 4-5% by the end of the year and within 2-3% by the middle of next year.”
If so, Sunak will hit his first target.
No weekly shopping shopper will see clear evidence that inflation is still on the decline. According to the Office for National Statistics, food and drink cost 17.3 percent more last month than a year ago, an astronomical increase and just below March's peak of more than 19 percent.
And while the energy price ceiling fell in April, gas bills in June were still more than double what they were before Russia's invasion of Ukraine.
However, there are promising signs that inflation is on the wane. Drivers couldn't help but notice that petrol has fallen to an average of £1.43 a litre, from a peak of £1.91 last July.
These figures will be welcomed by the Bank of England, which is under heavy pressure to bring inflation back a little closer to its 2 percent target, which was last reached in July 2021.
Inflation has yet to come close to that target, but it has come down significantly from a peak of 11.1% in October last year and is now at a 16-month low.
The Bank's Monetary Policy Committee (MPC) has been raising interest rates over the past year and a half in an attempt to cope with rising prices.
So far, it has raised rates from 0.1% in December 2021 to 5% last month, but sharply tightening proved to be powerless. when it comes to general inflation.
This is partly due to the fact that the energy crisis was an international crisis where food prices on world markets were similarly set. But this is also due to the fact that it is generally believed that the full impact of interest rate increases on consumer prices takes 18-24 months, so the main force of these decisions of the Bank should only begin to take effect now.
There were fears that the Bank was falling into despair.
In shock and awe, the MPC raised interest rates by 0.5 percentage points last month, effectively double the 0.25 percentage point increase. at two previous policy meetings.
Interest rate at 2,306 boe
Economists expected another such spike next month.
But now inflation is falling faster than expected, analysts suspect the Bank will opt for a smaller hike instead.
Samuel Tombs of Pantheon Macroeconomics says: next month.”
“The worst is over for UK households and MPC will not need to raise the bank rate to 6.25% as prices were priced into the markets yesterday [Tuesday].”
Financial markets agree. Reacting to a lower inflation rate, traders now expect interest rates to peak at 5.75% later this year.
Further price drops are on the horizon, with marginal energy prices falling again in July, helping to bring down inflation next month.
Headline inflation is not the only factor at play, and other price pressures are adding to the belief that costs are finally being brought under control.
The base number is also closely watched by core inflation. The measure eliminates energy and food prices to come closer to price pressures in the domestic economy, rather than in sectors with large imports.
Core inflation eased to 6.9% in June from 7.1% in May, a welcome turnaround given it has been on the rise in previous months even as headline inflation has been declining.
An alternative measure of UK-generated inflation is linked to the service sector. While the cost of goods and energy is often linked to world prices, the price of services is more dependent on wages. Pressure here also eased from 7.4% in May to 7.2% in June, again signaling a reversal from the recent increase.
Wage spike 2206
In addition, businesses are facing price pressures, indicating that costs are being passed on to consumers.
Prices paid by businesses for the goods and services they buy fell 2.7%, the first year-on-year decline in their costs since November 2020. This marks a dramatic shift from last summer, when companies found their costs were up by almost a quarter.
This applies to their customers, whether they sell to consumers or other businesses.
Factory selling prices rose just 0.1% for the year, again the lowest increase since the end of 2020. .
But big risks remain. When it comes to the pressure on households, a complete cessation of inflation will not mean a reduction in the cost of living – just prices will stabilize at today's high levels.
Therefore, workers will continue to seek higher wages to try to regain the purchasing power lost in recent years of high inflation.
Just last week, the Governor of the Bank of England and the Chancellor warned workers and businesses not to go overboard with wage increases.
Average earnings rose 7.4% year-on-year in May, with private sector wages up 7.7%, well within the reach of inflation, indicating that workers will soon at least be in balance when it comes to their finances, even if they don't actually feel any better.
But it poses a danger from an MPC perspective, as higher wages mean higher costs for businesses and also gives families more purchasing power, which in turn could increase inflationary pressures.
>The Bank of England is unlikely to want to take off the brake until politicians are confident that inflation is under control. After the experience of the past two years, with inflation still nearly four times above target, officials dare not risk complacency.
Yael Selfin, chief economist at KPMG UK, says the Bank is unlikely to change course when inflation is still extremely high, even if it is heading in the right direction.
“While the Bank of England will welcome falling inflation, it is unlikely that it will significantly change its hawkish policy. because inflation is still well above the target,” she says.
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