Britain’s inflation rate cooled more than expected to the lowest level in more than a year, a sign that soaring interest rates may be starting to curtail the worst wage-price spiral in the Group of Seven nations.
The Consumer Prices Index was 7.9 per cent higher than a year ago in June, a sharp drop from the 8.7 per cent reading in May, the Office for National Statistics said Wednesday.
The pound weakened, and investors pared back bets on a further sharp surge in interest rates.
It was the first downward surprise in five months and the biggest miss since July 2021, below the 8.2 per cent expected by economists.
“The main story today is that inflation is lower than expected, fuelling a narrative that we are through the worst,” said Kitty Ussher, an economist at the Institute of Directors.
“The Bank of England will hope that this will cause business leaders and others to lower their expectations of future inflation, which could then become self-fulfilling.”
Core inflation also fell to 6.9 per cent from 7.1 per cent, suggesting the quickest series of interest rate increases in three decades may be starting to rein in soaring prices.
That may revive speculation about how many more rate hikes the Bank of England will deliver to contain prices, which are still rising almost four times quicker than its 2 per cent target.
“You could almost hear the sigh of relief at the BOE,” said Valentin Marinov, head of G-10 currency research at Credit Agricole.
“As a minimum, the UK rates investors could reconsider their expectations of a 50 basis-point hike in August and may even reassess the expectation of 6 per cent terminal rate.”
What Bloomberg Economics says
“The unexpected slowdown in core inflation in June will probably be enough for the Bank of England to favor a 25 basis-point hike at its August meeting — but the decision is likely to be finely balanced. With underlying price pressure set to ease only slowly over the remainder of the year, we think the central bank is on course to hike rates again in September and November.”
The pound extended losses after the release as rates traders pared bets on further interest rate hikes.
The market now sees the key rate peaking below 6 per cent, down from as high as 6.5 per cent priced earlier this month.
The odds of a half-point hike in August — almost fully priced before the release — dropped to one in two. Sterling fell as much as 0.8 per cent to one-week low of $US1.293 ($1.92).
Investors have fully priced in a quarter-point hike from the current 5 per cent but were wavering about the chances of a second consecutive half-point increase.
Former BOE rate-setter Michael Saunders told Bloomberg earlier this week that a headline CPI reading of more than 8.2 per cent would have been “deeply alarming” while a reading below would be “somewhat reassuring.”
“After the disappointment of more persistent than expected inflation in May, June’s reduction in headline inflation is a relief for consumers and industry alike,” said Lisa Hooker, industry leader for consumer markets at PwC.
The sharp easing means inflation is now in line with the BOE’s expectations for where price growth would be in June.
Inflation in recent months had been running well above what the BOE had predicted in its May forecasts, helping to boost bets on higher interest rates.
Services inflation — a measure being closely watched by the Bank of England for signs of domestically generated inflation — also eased to 7.2 per cent in June, down from 7.4 per cent the previous month.
The ONS said inflation was dragged down by falling prices for motor fuel and cooling grocery bills.
Prices for food and non-alcoholic drinks climbed 17.3 per cent, down from a 18.3 per cent rise in May.
Inflation in restaurant and hotel prices also dropped to 9.5 per cent from 10.3 per cent in May, driven by the accommodation sector, in a sign that demand may be loosening and wage pressures may be beginning to ease.
Slower inflation could undercut some bets on the pound and rate expectations. Investors have made the pound one of the best performing currencies in the Group of 10 nations this year and priced in the benchmark lending rate hitting 6.25 per cent in the coming months, the highest since 1999.
That contrasts with the US, where a sharp slowdown in inflation to just 3 per cent has offered hope that the Federal Reserve can soon wrap up its own rate-tightening cycle.
Yael Selfin, chief economist at KPMG, said the Bank of England was “unlikely to substantially change its hawkish policy stance” as inflation was still well above target.
“Inflation is unlikely to return to target before early 2025,” she said. “We expect inflation to average 7.5 per cent this year before falling to 3 per cent in 2024.”
Slowing inflation is a relief for consumers, who have been struggling with food and energy costs, as well as a spike in mortgage rates.
It also helps Prime Minister Rishi Sunak, who has promised to cut the pace of price increases in half this year from the 10.5 per cent reading at the end of 2022.
“That’s a pleasant number for the BOE,” said Rishi Mishra, an analyst at Futures First Canada.
“At 6.9 per cent, core CPI is still very high, but the direction of travel is right and I think the market will shift the terminal rate closer toward 5.75 per cent.”
Mr Sunak, whose Conservative Party lags far behind the Labour opposition in national opinion polls, has admitted it may take longer to get inflation under control.
“Inflation is falling and stands at its lowest level since last March,” Chancellor of the Exchequer Jeremy Hunt said in a statement.
“But we aren’t complacent and know that high prices are still a huge worry for families and businesses.”
There were further signs of pipeline price pressures easing, which officials hope will be soon be passed on by retailers.
Producer input prices fell a larger-than-forecast 1.3% on the month amid a drop in oil and commodity prices. They were down 2.7 per cent from a year earlier, the first negative annual reading since November 2020.
The price of goods leaving factory gates fell 0.3 per cent, leaving them up just 0.1 per cent on the year.
Bloomberg