Unexpected drop in inflation brings relief, but concerns loom large

Unexpected drop in inflation brings relief, but concerns loom large

Kevin Brown

The UK’s inflation rate witnessed a greater-than-expected drop to 7.9% in June, a 13-month low, due to a decrease in petrol prices, as reported by the Office for National Statistics (ONS).

This figure represents a noteworthy decline from May’s 8.7% inflation rate, the weakest since the onset of the Ukraine conflict.

This slowdown in inflation brought a sense of relief to the Bank of England, which had been grappling with high price increases throughout the year. Following the release of this data, the pound experienced a downturn against the dollar and euro, setting expectations for a less significant raise in the base rate by the Bank’s Monetary Policy Committee (MPC) next month.

The core inflation rate, an economic indicator excluding volatile items such as energy and food, retreated from a 31-year high of 7.1% to 6.9% in June, indicating a potential ease in the underlying inflationary pressures in the UK economy. The ONS attributes the June inflation drop to decreasing motor fuel prices and energy costs, compared to the same period last year. Prices of core goods and services also saw a decline to 8.5% and 7.2%, respectively.

Despite this slowing down of price increases, UK inflation remains higher compared to the US and Europe. However, even with food price inflation decelerating from 18.2% to 17.4%, it continues to contribute significantly to the persistently high inflation.

Kevin Brown, savings specialist at Scottish Friendly, commented: “The good news is that price rises are slowing, but let’s not forget they’re still rising faster than they have done for the best part of 40 years.

“UK households have had to swallow a huge increase in living costs over the past 18 months and these higher prices are now bedded into the economy.

“Wages have failed to keep pace with rampant inflation and it’s leaving consumers facing a financial shortfall. Historically, interest rate rises encourage an increase in saving, but we are now seeing record outflows as people scramble to shore up their finances.

Mr Brown noted: “New figures also reveal outstanding credit card debt rose by nearly 10% in April compared with the previous year. It suggests the gap between people’s income and outgoings is widening and that budgeting alone is clearly not enough to make ends meet.

“The Monetary Policy Committee is set to yet again raise interest rates next month and will be desperately hoping it helps to bring down inflation further and more quickly. The longer they both remain high, the greater the long-term repercussions for UK household finances and the UK economy overall.”

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