UK facing ‘high’ risk of recession despite inflation dropping to 6.8% – business live | Business

UK inflation: which goods and services have changed most in price?

House price inflation has also slowed, led by a drop in price in London.

The Office for National Statistics reports that the average UK house prices increased by 1.7%, or £5,000 in the 12 months to June, to £288,000.

That’s also £5,000 below the recent peak in November 2022.

Prices in London were 0.6% lower than a year ago, the ONS says, while prices were 4.7% higher over the last 12 months in the North East.

But…. lenders Nationwide and Halifax have both reported UK house prices fell year-on-year in June. Their reports are based on mortgage lending, while the ONS include cash buyers, so should give a clearer (if more dated) picture of the market….

Newsnight’s Ben Chu points out that core inflation looks ‘worryingly sticky’, and also higher than in other G7 countries:

Economists at French bank BNP Paribas says the Bank of England is very likely to raise UK interest rates to 5.5% next month, although a large hike to 5.75% can’t be ruled out.

They say:

• Today’s July inflation data by itself shouldn’t move the needle for the Bank of England. The figures were broadly in line with its expectations and showed an encouraging further sign of cooling, on the whole.

• However, with yesterday’s labour market figures revealing that wage growth is still accelerating, the risk is that this declining trend in price pressures proves unsustainable or short-lived.

• Our overall reading of this week’s data therefore is that the MPC still has work to do. Another 25bp hike in September is all but nailed on and while 50bp cannot be ruled out, we think the risk is tilted towards an even longer tightening cycle.

Food prices were almost flat in July, according to the inflation report, which shows a 0.1% increase in prices month-on-month.

That left annual food price inflation at 14.9%.

Helen Dickinson, chief executive of the British Retail Consortium, has warned there are “potential stumbling blocks ahead” that could prevent food prices normalising faster.

Russia’s withdrawal from the Black Sea Grain Initiative and subsequent targeting of Ukrainian grain facilities, as well as rice export restrictions could put pressure on some global commodity prices, slowing the fall in food prices

Many households will find their mornings getting cheaper, with “price drops in tea, coffee, milk, breakfast cereals and fruit”, Dickinson added.

James Smith, research director at the Resolution Foundation, has written a detailed thread about today’s inflation report – showing that the UK still has the highest inflation rate in the G7:

The drop in CPI inflation to 6.8% last month confirms that real wages are, finally, rising again. At least for some workers.

Yesterday’s labour market report showed that total pay rose by 8.2% per year in April-June, swelled by bonus payments to NHS staff. Regular pay (excluding bonuses) rose by 7.8%.

That’s still below today’s RPI inflation measure, though, of 9%.

Private sector pay rose by 8.2% per year, on average, while the public sector lagged behind at 6.2%.

TUC general secretary Paul Nowak points out that workers have suffered a long squeeze in real earnings:

“We all want to see lower inflation. But it will take more than price rises slowing for working people to feel better off – especially with food bills remaining sky high.

“Real wages are still worth less today than in 2008 after the longest pay squeeze in 200 years. And at the same time, unemployment and insecure work are shooting up.

“Our economy is far from out of the woods – too many long-run challenges remain unaddressed.

“We need a credible plan to deliver decent well-paid jobs across the country. The Conservatives have yet to produce one despite being in office for the past 13 years.”

Julian Jessop, economics fellow at the Institute of Economic Affairs, the right-wing tank, argues that that Bank of England should resist raising interest rates in September.

Jessop says the BoE should pause, and assess the impact of its previous 14 increases in interest rates:

“The inflation data shows a welcome fall in the headline rate, but core inflation that excludes food and energy remains stuck at 6.9%. The headline rate is also likely to tick up in August, reflecting higher fuel and alcohol prices, some unhelpful base effects, and the continued strength of the labour market.

“There are still plenty of reasons to expect inflation to tumble over the rest of the year, notably the sharp slowdown in money and credit growth. Rising unemployment and falling vacancies suggest that wage pressures will soon peak too.

“Unfortunately, the Bank of England continues to look backwards at the headline data over the last month or two, rather than pause to assess the impact of the substantial tightening in policy that is already in place. This makes another unnecessary interest rate increase more likely.”

IFS: Stubborn inflation puts PM’s inflation target in jeopardy

Kallum Pickering, senior economist at Berenberg Bank, predicts inflation could “fall fast” in the next few months, and drop below 5% by the end of 2023.

That would mean Rishi Sunak could claim victory in his aim of halving inflation this year (although, as the Today programme flagged earlier, falling prices of global oil and food must take some credit).

Pickering says:

UK fundamentals are now decidedly disinflationary.

Monetary policy is turning ever tighter (that is, almost by definition, disinflationary), consumer inflation expectations are falling, producer prices are normalising, unemployment is rising and vacancies are down sharply.

If these trends continue, inflation should fall fast over coming months towards a 4-5% yoy rate by the end of the year and to within the 2-3% range by the middle of next year. While elevated wage growth presents an upside risk to this call, the evidence suggests wages are lagging inflation rather than leading it.

UK inflation will continue to decline from here as lower energy and goods prices continue to feed through, predicts Thomas Pugh, economist at audit, tax and consulting firm RSM UK.

Pugh explains:

Output prices at factories fell by 4.8% in July – a good sign for future goods price inflation. What’s more, growing slack in the labour market as labour supply improves and demand for labour ease a little should reduce wage growth over the next year, limiting the risk of a wage-price spiral.

Pugh adds that the Bank of England is likely to raise interest rates again next month, but the peak in borrowing costs could be close:

Overall, inflation, especially core and services, is still too high for the MPC to tolerate, which, combined with fast wage growth, means another rate hike is September is a sure bet.

But cooling inflationary pressures means this can be another 25bps hike and that the peak in interest rates is not far off.

Petrol and diesel prices also pulled inflation down in July.

The ONS reports that motor fuel prices fell by 24.9% in the year to July 2023, compared with a fall of 22.7% in June.

Petrol cost an average of 143.2p per litre in July, down from 189.5p a year ago – when the surge in crude oil prices after the Ukraine invasion pushed up prices at the pumps.

Diesel dropped to 145.2p per litre, on average, down from 197.9p per litre in July 2022.

But on a monthly basis, petrol prices rose by 0.2p per litre between June and July, while diesel prices dropped by 0.5p in the month.

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Rachel Reeves correctly flagged earlier that inflation, at 6.8%, is still higher in the UK than in many other major economies.

For example, in the US, inflation was just 3.2% in July, slightly up from 3% in June.

In the eurozone, annual inflation was 5.3% in July, with inflation estimated at 6.5% in Germany, and 5% in France.

Japan’s inflation rate was 3.3% in June, with July’s figures due on Friday.

While China has slipped into deflationary territory, with its consumer price index down by 0.3% year-on-year in July.

Core inflation stubbornly high

Data: Why UK inflation slowed