Inflation drops back by more than forecast to 15-month low

Inflation has eased by more than expected to its lowest level for 15 months in a sign that price rises may finally be slowing down.

The Office for National Statistics (ONS) said Consumer Prices Index inflation was 7.9% in June, down from 8.7% in May and its lowest rate since March 2022.

Most economists had expected the rate of inflation to fall to 8.2% in June.

The ONS said falling fuel prices was the biggest driver behind the drop, while food price inflation also pared back to 17.3% from 18.7% in May, though still painfully high.

ONS chief economist Grant Fitzner said: “Inflation slowed substantially to its lowest annual rate since March 2022, driven by price drops for motor fuels. Meanwhile, core inflation also fell back after hitting a 30-year high in May.

“Food price inflation eased slightly this month, although it remains at very high levels.

“Although costs facing manufacturers remain elevated, especially for construction materials and food items, the pace of growth has fallen across the last year, with the overall cost of raw materials falling for the first time since late 2020.”

The steep fall in inflation means that while prices are still rising, they are not increasing at such a rapid pace.

It comes after inflation proved stubborn in recent months, failing to come down as sharply as hoped.

June’s figures could see the Bank of England opt for a smaller increase in interest rates at its next meeting in August after June’s shock half a percentage point rise to 5%, according to experts.

This will raise hopes that rates do not need to climb as high as feared – with financial markets recently forecasting 6.25% by next March – offering a chink of light for under-pressure mortgage borrowers.

But CPI is still a long way from the Government’s target to halve inflation to 5.3% by the year end.

Chancellor Jeremy Hunt said: “We aren’t complacent and know that high prices are still a huge worry for families and businesses.

“The best and only way we can ease this pressure and get our economy growing again is by sticking to the plan to halve inflation this year.”

Jake Finney, an economist at PwC, said falling energy prices and food inflation finally turning the corner “should see inflation get closer to 5% by the end of this year”.

He added: “Better-than-expected CPI figures could shift the dial to a 25 basis points rise to the Bank of England base rate in August, rather than 50 basis points.

“If today’s progress on services inflation continues this could provide the Bank with the breathing room needed to hike rates to a lesser extent than markets are currently expecting.”

Annual inflation slowed in June 2023.

▪️ Consumer Prices Index including owner occupiers’ housing costs (CPIH) rose by 7.3% in the 12 months to June 2023, down from 7.9% in May
▪️ Consumer Prices Index (CPI) rose by 7.9%, down from 8.7% in May

➡️ https://t.co/cPUYOHcBiw pic.twitter.com/hDD1Q2AiJb

— Office for National Statistics (ONS) (@ONS) July 19, 2023

In another encouraging sign, so-called core inflation data was also better than feared, falling back to 6.9% from a 30-year high of 7.1% in May.

Core CPI – which excludes the price of energy, food, alcohol and tobacco – is often more in focus for the Bank’s Monetary Policy Committee (MPC) members when they set interest rates.

The ONS data showed that overall motor fuels fell by a record 22.7% in June.

Average petrol and diesel prices stood at 143p and 145.7p a litre respectively last month, compared with 184p and 192.4p a litre a year earlier.

The latest figures also showed the CPI measure of inflation including housing costs (CPIH) fell to 7.3% from 7.9% in May.

The Retail Prices Index, which is used to calculate the rise in train fares among other things, slowed to 10.7% from 11.3% in May.