Stubborn core inflation piles pressure on Bank of England

Economists expect further interest rate hikes by the central bank

Inflation proved stubborn in July as economists warned that underlying pressures meant the UK was not yet at a turning point on price rises.

The consumer prices index (CPI) rose by 6.8pc in the year to July, according to the Office for National Statistics (ONS), as the lower energy price cap pulled down household bills.

While the drop was in line with the Bank of England’s prediction of 6.8pc, economists had expected a sharper fall to 6.7pc.

July’s figure was down from 7.9pc in June and represents the lowest rate since February 2022, at the start of Russia’s war in Ukraine.

However, core inflation, which strips out volatile price movements in food and energy, remained at 6.9pc in July, against expectations for a slight fall to 6.8pc.

Services inflation, which is being watched closely by the Bank, also rose 7.4pc, up from 7.2pc in June. Both suggest policymakers will be forced to keep raising interest rates from their current level of 5.25pc to try to keep a lid on inflation.

Paula Bejarano, an economist at the National Institute of Economic and Social Research, said: “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 7pc.”

Food prices also continued to rise sharply, at 14.8pc in the year to July.  However, this is down from 17.3pc in June and comes as a price war heats up among supermarkets.

Dairy prices have been the first to fall, with all of Britain’s major grocery chains announcing price cuts of staples in recent weeks.  This includes Asda which on Friday will cut the prices of 226 own-label products by an average of 9p.  

Rival Sainsbury’s has said it is investing £15m to cut the price of its own brand items such as rice, cornflakes and runny honey. ONS figures show whole milk prices rose 3.1pc in the year to July, while butter prices rose 2.2pc, compared with rises of 28.1pc and 27.1pc a year ago. 

Matthew Corder, the ONS’s deputy director of prices, said: “Although remaining high, food price inflation has also eased again, particularly for milk, bread and cereal.” 

However, the price of other essentials keeps soaring.  Pasta prices rose 23.1pc on a year earlier, while olive oil prices are up by more than 40pc. Russia’s recent decision to withdraw from a key Black Sea grain deal could put further upward pressure on food prices, according to economists. 

Changes in the energy price cap from July 1 saw average annual gas and electricity bills fall from £2,500 to £2,074, which was the biggest downward driver of inflation last month.

The figures were released a day after data showed wages are growing at the fastest pace since records began. Total pay grew by 8.2pc in the three months to June compared with a year earlier, according to the ONS, while regular pay rose 7.8pc.

Pay growth is on course to stay strong as price rises cool, suggesting workers are seeing real pay growth for the first time in 18 months.

However, economists said it will also encourage the Bank of England to raise interest rates above their current 5.25pc level for a fifteenth straight time in September.

The retail prices index (RPI), which is no longer an official statistic but is used to calculate increases in a range of consumer bills and linked to government borrowing costs, increased by 9pc in the year to July.

Rail fares usually rise in January in line with July’s RPI.

However, the Department for Transport has already said regulated fares will not increase as much as the July figure in 2023.

Ministers have not confirmed how much the new cap will rise by. Jeremy Hunt welcomed the inflation figures but the Chancellor added: “We’re not at the finish line. We must stick to our plan to halve inflation this year and get it back to the 2pc target as soon as possible.”

Economists also warned that Rishi Sunak’s goal to halve inflation to around 5pc remained in doubt.  

Heidi Karjalainen, an economist at the Institute for Fiscal Studies, said: “The Prime Minister’s target to halve the rate of inflation by the end of the year was always a little odd as there is only so much the Treasury can do to influence the pace of price increases. 

“When the target was set, the Prime Minister may have hoped he could rely on falling energy prices to do most of the work to hit it.

“However, the stubbornly high rate of price inflation for goods and services other than food and energy has put the target in jeopardy. With only 4 months to go, it no longer seems at all clear that inflation at the end of the year will have fallen by enough to achieve it.”