he headline rate of inflation for June has fallen faster than expected, in a drop that will ease nerves about the the Bank of England’s long and bitter fight against rising prices.
The Consumer Price Index hit 7.9% for June, having been forecast to fall to 8.2% from 8.7% in May, driven by fuel prices. Core inflation – which excludes food and energy costs – also dropped further than expected, to 6.9%, having been predicted to stick at 7.1%.
After 13 consecutive interest rate hikes from the Bank of England, policy makers in Threadneedle Street have been looking for signs that their fight against soaring prices is kicking in. Their target for inflation is 2%.
Marcus Brookes, chief investment officer at Quilter Investors, said the June drop offered “a glimmer of light”, adding that it was a “nice surprise” from the numbers falling by more than expected. But he continued:
“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 … it 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.”
The BOE looks likely to lift rates again at its next meeting in August, with a rise of a quarter-point or even a half-point expected, taking the base cost of borrowing up from 5%.
The Monetary Policy Committee’s run of 13 consecutive rate rises will add £200 to the monthly mortgage repayments of some borrowers coming off fixed-rate loans this year, according to the BOE’s own figures, rising to a potential £500 by 2026.
The rises have slowed demand, especially from first-time buyers, as mortgage rates have spiked higher.
Clare Batchelor, Mortgage Operations Manager at Wesleyan, said rising rates “will ring alarm bells for those seeking a mortgage or who are about to slip onto a variable deal,” adding:
“Mortgage rates have recently raced to 15-year highs, heaping hundreds of pounds on household budgets that will already be painfully tight. For those who will be hit by a higher rate in the coming months, it’s recommended to speak to a mortgage adviser now – it can take time to find and secure a deal, and any delay may be costly.”
ING, the Dutch bank, said the CPI reading will “make or break” the prospects for a larger, half-point rate hike in August, as the BOE battles with inflation that is proving stubbornly high in the UK.
“Investors currently expect a peak for Bank Rate at 6.15%, said James Smith, developed markets economist. “The Bank of England can probably get away with hiking slightly less than markets expect.
“Progress on services inflation should be enough to convince the committee to pause its hiking cycle in November, which would suggest a peak rate of either 5.50% or 5.75%”
Today’s set-piece numbers followed news of “incredibly high” grocery price inflation yesterday from Kantar, the market research and data analytics firm, which used the term to label the 14.9% rise in food prices. But it was also the fourth consecutive month of a drop, taking the number further away from March’s peak of 17.5%.
The official CPI data showed some food prices were still rising, at percentage rates in the high teens, including soft drinks and chocolate.