Core Inflation Overtakes Headline CPI

Main points

• Annual consumer price inflation was 6.8 per cent in July, down from 7.9 per cent in June. This fall was largely driven by price decreases in gas and electricity, as well as monthly food inflation being lower in June 2023 than June 2022. These downward contributions to inflation were partially offset by price increases in restaurants and hotels.
• Food inflation fell substantially to an annual rate of 14.8 per cent in July from 17.3 per cent in June. Still, that it remains so elevated is concerning since there is no government support to help households (especially lower income households, who spend a greater part of their incomes on food) offset this cost.
• Though this fall in the CPI rate was expected, given that the Ofgem energy price cap significantly decreased on 1 July, the latest figure of 6.8 per cent represents a downward surprise in headline inflation relative to the forecast in NIESR’s Summer UK Economic Outlook. However, the rate of inflation of services rose to 7.4 per cent, while core CPI inflation remained at 6.9 per cent. At the same time, NIESR’s measure of underlying inflation, which excludes 5 per cent of the highest and lowest price changes, also remains high at 8.6 per cent in July, though it fell from 9.4 per cent in June. So, while headline inflation seems to be easing by more than expected, we have yet to see a significant turning point in underlying inflationary pressures in the economy.
• NIESR’s Summer UK Economic Outlook, published last week, expects inflation to fall to 5.2 per cent by the end of 2023. That said, we view the risks to inflation as tilted to the upside, given the latest data on underlying inflation as well as key risks to our forecast (such as a possible escalation of Russia’s war in Ukraine or the risk of inflation expectations becoming embedded in household/firm behaviour).

“Annual CPI inflation rose by 6.8 per cent in July, down from 7.9 per cent in June, driven by falling gas and electricity prices as well as a softening in the pace of food inflation. However, measures of underlying inflation remain high: core CPI rose by 6.9 per cent in the year to July, unchanged from June; annual services CPI rose from 7.2 per cent in June to 7.4 per cent in July; and NIESR’s trimmed-mean CPI estimate remains high at 8.6 per cent, though having fallen from 9.4 per cent in June. Altogether, these data indicate that, despite the welcome fall in the headline rate, we have yet to see a turning point in the underlying rate of inflation, which remains stagnant at around 7 per cent.”

 Paula Bejarano Carbo
Associate Economist, NIESR

For a breakdown of what inflation is and how it is calculated, read our blog post here.

See our UK Economic Outlook.