UK inflation falls more than expected to 7.9% in June

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UK inflation fell to a 15-month low of 7.9 per cent in June, a bigger than expected drop that sent the pound falling, rallied property shares and came as a boost for prime minister Rishi Sunak.

Wednesday’s figures led investors to trim their expectations of an interest rate rise, with markets now betting on a quarter rather than half point increase at the Bank of England’s next meeting on August 3.

Sterling fell to its lowest level in a week, trading down 1.1 per cent against the dollar at $1.2897.

Annual inflation was down from 8.7 per cent in May, the Office for National Statistics said, below the 8.2 per cent predicted by a Reuters poll and ending a four-month run during which inflation outstripped forecasts.

“With significant inflation falls now coming through, the UK is less of an outlier in the battle to tame inflation,” said James Smith, research director at the Resolution Foundation think-tank.

Aided by a drop in the cost of motor fuels, the headline figure was the lowest since March 2022, while underlying “core” inflation fell slightly to 6.9 per cent.

Paul Dales, economist at Capital Economics, said that while the slide in inflation was unlikely to deter the BoE from increasing rates next month, “it may tilt the balance towards a 25 basis points hike rather than 50 basis points”.

Markets now put at 60 per cent the probability the Bank will increase the benchmark rate from 5 to 5.25 per cent at the August 3 meeting.

Before Wednesday’s figures, 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 expect BoE benchmark interest rates to peak just below 6 per cent early next year. Before the inflation figures came out, they had anticipated a peak of just above 6 per cent.

Dave Ramsden, a BoE deputy governor who serves on the monetary policy committee, cautioned on Wednesday that inflation remained “much too high”, emphasising the MPC’s concerns about wage growth and labour market tightness.

The latest data has shown wage growth accelerating to a record high.

But despite such worries, shares in UK property groups and housebuilders surged as investors concluded that mortgage rates would now also rise less than they previously expected.

Persimmon, Barratt and Taylor Wimpey rose 8.3 per cent, 7 per cent and 6.8 per cent, respectively, helping London’s FTSE 100 rise 1.8 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.

Myron Jobson at Interactive Investor, an online investment platform, said the reset in expectations “could spell the end of the chaos which has gripped the mortgage market in recent months”. 

The inflation figures were also welcome news for Sunak, who has sought to put economic competence at the heart of his electoral appeal but is far behind in the polls and faces three tough by-election tests on Thursday.

Downing Street said it was “encouraging to see headline and core inflation rates falling” but acknowledged that businesses and families were still suffering from high prices.

Asked whether Sunak was confident that inflation would halve by the end of the year to 5.4 per cent — one of five pre-election pledges the PM has made — his spokesman said: “We have set out that commitment. We are not going to forecast.”

But Rachel Reeves, shadow chancellor, maintained that “persistently high” inflation under Sunak’s government was “becoming a hallmark of Tory economic failure”.

One of the most closely watched metrics was the fall to 6.9 per cent in core inflation, which strips out volatile food, energy, alcohol and tobacco prices. It had reached a 31-year high of 7.1 per cent in the previous month, a level at which analysts had expected it to remain.

Services inflation also eased to 7.2 per cent in June from 7.4 per cent in May.

Despite remaining at historically high levels, food inflation also fell to 17.3 per cent in June, from 18.3 per cent in the previous month.

Overall UK inflation remains higher than in other G7 countries, with economists blaming a combination of surging energy costs and labour shortages.

In June, inflation slowed to a 27-month low of 3 per cent in the US and to a 17-month low of 5.5 per cent in the eurozone.

Dales at Capital Economics 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