Inflation falls to 7.9% in June

The core rate of inflation fell by 0.2% to 6.9%.

Annual CPI inflation has fallen from 8.7% in April and May to a lower-than-expected 7.9% in June, the latest ONS figures show.  Most economists had predicted a fall in inflation, with an average forecast of 8.2%, according to Reuters.  On a monthly basis, CPI rose by 0.1% in June, compared with a rise of 0.8% in June 2022.
The core rate of inflation, which strips out volatile food and energy prices, was predicted to remain at May’s elevated 7.1%, but fell to 6.9%.  CPIH inflation, which includes owner occupiers’ housing costs, rose by 7.3% in the 12 months to June 2023, down from 7.9% in May.  Falling prices for motor fuel led to the largest downward contribution to the monthly change in CPIH and CPI annual rates, while food prices rose in June 2023 but by less than in June 2022, also leading to an easing in the rates.

Derrick Dunne, CEO of YOU Asset Management, commented: “CPI inflation might have fallen sharply in the 12 months to June, but savers and investors should hold off celebrating just yet.
“Core inflation remains persistently high, notably within the clothing, healthcare, and communication divisions, among others.
“With inflation still nearly four times the Bank of England’s 2% target – and with wage growth continuing to climb – we cannot rule out another interest rate hike come August.
“We know that rate rises are the main weapon for central banks to discourage consumer spending, however they are an extremely blunt tool and can take between 9-12 months to be fully integrated into an economy.
“So, even if the Bank holds rates next month, it’s almost inevitable it will find itself overshooting in its attempt to tame inflation – something which will have major ramifications for both consumers and the economy.”

John Choong, markets and equity analyst at InvestingReviews, said: “Miracles do happen. For the first time in months, CPI comes in lower than expectations at 7.9%. Core CPI also comes in a touch lower at 6.9%, which should allow lenders and borrowers alike to breathe a sigh of relief. That said, champagne bottles shouldn’t be popped just yet as the path to 2% remains a treacherous journey, with core CPI still high and sticky. The easing figures should allow gilt yields to find some relief in the coming days, with markets now less likely to price in a 7% terminal rate from the Bank of England. We may now see mortgage rates start to come down as well. Nonetheless, this will be dependent on whether the next few prints continue to show cooling inflation, especially on the core front. With wage pressures also beginning to ease as well, there’s now hope that both the housing market and the UK economy can achieve a ‘soft landing’ without entering a recession.”

Marcus Brookes, chief investment officer at Quilter Investors, added: “Today’s inflation figures give us the glimmer of light as it finally surprises by beating expectations and falling more than predicted. However, while it is a nice surprise to beat expectations, it still leave us wondering once again why the UK is such a drastic outlier compared to other developed economies when it comes to inflation. While the rate of the price rises has dropped to 7.9%, this is still far above where the Bank of England wants it to be before it can even consider a pause in the rate hikes we have become accustomed to.

“Frustratingly, while also beating expectations core inflation is remaining persistently stubborn and refusing to budge significantly. It may be that finally the well-known lags in the effect of interest rate rises are beginning to have an effect, but it still remains very sticky so way too early to begin celebrating. Demand has withstood both inflation and the rise in rates, but cracks are appearing, and as more mortgage holders get exposed to the current rates, the economy is likely to be hit as a result.

“This is unfortunately the path that is likely going to have to be taken in order to get inflation back down to target. The Bank of England has raised rates considerably, and shows no sign of slowing down and thus we are probably on a path to recession in 2024. With an election likely to be next year too there is going to be jockeying from both main political parties, as they look to find a way to stimulate growth. However, in a period where inflation is sky high this is going to be difficult to achieve and thus the choppy waters are here to stay for at least the next 18 months.

“Inflation should begin to come back down to more palatable levels soon, but as we have seen these forecasts are unpredictable. For investors, this means seeking shelter in quality companies that can navigate this difficult environment, while also considering UK fixed income investments, such as gilts, as these look at attractive prices right now as we head into a potentially difficult economic period.”

Rozi Jones (Financial Reporter)

Retirement ProfessionalsInflation falls to 7.9% in June