Welcome Fall in Headline Rate Despite Little Movement in Underlying Measures

Main points

• Annual consumer price inflation rose by 7.9 in June, down from 8.7 per cent in May. This fall was largely driven by price decreases in motor fuels which were partially offset by price increases in food, and restaurants and hotels.
• Food inflation fell to an annual rate of 17.3 per cent in June from18.3 per cent in May. 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.
• The latest figure of 7.9 per cent represents a downward surprise in headline inflation, with annual energy price inflation decreasing by 54.2 percentage points and the annual rate of food inflation falling by a full percentage point relative to May. At the same time, the rate of inflation of services and non-energy industrial goods has plateaued around 7 per cent, unsurprisingly close to today’s core CPI figure of 6.9 per cent. So, while headline inflation seems to be easing by more than expected, we have yet to see a significant movement in underlying inflationary pressures in the economy.
• Services inflation fell from a 31-year high of 7.4 per cent in May to 7.2 per cent in June. Elevated wage growth in this sector will concern monetary policymakers, who may take this as a sign that services inflation will continue to generate persistence in underlying inflation in the United Kingdom, despite monetary tightening.

“Annual CPI inflation rose by 7.9 per cent in June, down from 8.7 per cent in May, driven by falling prices for motor fuel which was partially offset by rising prices in food. Measures of underlying inflation also eased slightly in June: for example, core CPI and services inflation both fell from 31-year highs of 7.1 per cent and 7.4 per cent, to 6.9 per cent and 7.2 per cent, respectively. Though these are all welcome falls, it remains concerning that these measures of underlying inflationary pressures continue to plateau around 7 per cent, well above the Bank of England’s target of 2 per cent. “

 Paula Bejarano Carbo
Associate Economist, NIESR

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