UK inflation fell to a 15-month low of 7.9 per cent in June, a bigger drop than anticipated that made it more likely that the Bank of England will raise interest rates by only a quarter point next month. Sterling fell and property stocks rallied on the news.
Annual inflation was down from 8.7 per cent in May, the Office for National Statistics said on Wednesday. The figure was lower than the 8.2 per cent forecast by economists polled by Reuters, ending a four-month period of price growth exceeding forecasts. It was also in line with the 7.9 per cent forecast by the BoE in May and the lowest since March 2022, while underlying “core” inflation also fell slightly to 6.9 per cent. Sterling fell 1.1 per cent against the dollar to $1.2893, its lowest level in a week.
Downing St said it was “encouraging to see headline and core inflation rates falling” but that there was no room for complacency, adding that businesses and families were still suffering from high prices.
Asked whether Rishi Sunak, prime minister, was confident that inflation would halve by the end of the year to 5.4 per cent, his spokesman said: “We have set out that commitment. We are not going to forecast.”
Paul Dales, economist at Capital Economics, said that, while the fall in inflation was unlikely to deter the BoE from increasing interest rates from the current 5 per cent at its next meeting, “it may tilt the balance towards a 25 basis points hike rather than 50 basis points”.
Markets now give a 60 per cent probability to a quarter point rise to 5.25 per cent at the August 3 meeting. Before Wednesday’s news they had been pricing in a better than even chance that the bank would increase rates by a half percentage point to bring inflation back to its 2 per cent target.
Traders now expect BoE benchmark interest rates to peak just below 6 per cent early next year, compared with just above 6 per cent that was expected before the inflation figures.
Lower inflation is likely to ease the pressure on mortgage rates after stronger than expected price and wage growth over the previous months had pushed up interest rate expectations and therefore payments for borrowers.
Shares in UK property groups and housebuilders surged as investors dialled back their expectations for where interest rates might peak.
Persimmon, Barratt and Taylor Wimpey rose 8.9 per cent, 6.2 per cent and 6.1 per cent, respectively, helping London’s FTSE 100 rise by 2 per cent.
Land Securities, one of the UK’s largest landlords, and real estate group Segro were also among the FTSE’s biggest winners on Wednesday.
In one of the most closely watched metrics of Wednesday’s figures, core inflation, which strips out volatile food, energy, alcohol and tobacco prices, declined to 6.9 per cent in June from a 31-year high of 7.1 per cent in the previous month. Analysts had expected core inflation to be unchanged.
Services inflation eased to 7.2 per cent in June from 7.4 per cent in May.
Both core and services inflation are closely watched by BoE policymakers to monitor underlying and domestic price pressures and decide on interest rates.
The data will be welcome news for UK prime minister Rishi Sunak, who has pledged to halve inflation this year before a probable 2024 election.
Chancellor Jeremy Hunt said: “Inflation is falling and stands at its lowest level since last March, but we aren’t complacent and know that high prices are still a huge worry for families and businesses.”
Rachel Reeves, shadow chancellor, said: “Inflation has been persistently high and remains higher than our international peers. This is becoming a hallmark of Tory economic failure.”
Grant Fitzner, ONS chief economist, said that in June “inflation slowed substantially to its lowest annual rate since March 2022, driven by price drops for motor fuels”.
Led by motor fuel, the price of transport fell by an annual rate of 1.8 per cent last month.
Although it remained at historically high levels, food inflation also eased to 17.3 per cent in June, from 18.3 per cent in the previous month. ONS data also showed that the annual growth of producer price inputs, such as parts and materials, turned negative in June for the first time since November 2020. The rate has slowed for the 12th consecutive month from its record annual high of 24.4 per cent in June 2022 to minus 2.7 per cent last month.
Despite the larger than expected decline, UK price growth remained higher than in other G7 countries, with economists blaming a combination of surging energy costs and labour shortages.
In June, US inflation slowed to a 27-month low of 3 per cent, while price growth dropped to a 17-month low of 5.5 per cent in the eurozone.
Dales said: “The UK will probably still have higher rates of inflation than elsewhere for a while yet, but at least the UK is now following the global trend.”
Additional reporting by Mary McDougall