The UK’s annual inflation rate dropped to 8.7% in June, down from 10.1% in May, according to the latest data from the Office for National Statistics (ONS). This is the first time since August 2020 that the inflation rate has fallen below 10%, but it is still well above the Bank of England’s (BoE) target of 2%.
What drove the inflation slowdown?
The main reason for the lower inflation rate in June was a fall in the prices of motor fuels, clothing and footwear, and alcoholic beverages and tobacco. These categories had seen sharp increases in previous months due to the easing of lockdown restrictions and higher global oil prices.
The ONS said that motor fuel prices fell by 2.5 pence per litre between May and June, compared with a rise of 3.9 pence per litre a year ago. Clothing and footwear prices also fell by 2.5% on average, as retailers offered more discounts than usual to clear their stock.
Meanwhile, the prices of alcoholic beverages and tobacco decreased by 0.8%, mainly due to lower duty rates on some spirits and cigarettes.
What kept the inflation rate high?
Despite the slowdown in inflation, some categories continued to see strong price rises in June, especially food and non-alcoholic beverages, housing and household services, and recreation and culture.
The ONS said that food and non-alcoholic beverage prices rose by 0.6% between May and June, compared with a fall of 0.1% a year ago. The annual inflation rate for this category was 17.3%, the highest since January 2010.
The main drivers of food price inflation were meat, fish, oils and fats, bread and cereals, milk, cheese and eggs, and sugar, jam, syrups, chocolate and confectionery. The ONS attributed these increases to higher costs of raw materials, transportation and labour, as well as strong demand from consumers.
Housing and household services prices also rose by 0.6% between May and June, compared with a fall of 0.2% a year ago. The annual inflation rate for this category was 9%, the highest since October 2011.
The main drivers of housing price inflation were rents, council tax, water supply and sewerage collection, electricity, gas and other fuels, and household goods and services. The ONS said that these increases reflected higher costs of maintenance and repair, energy supply and waste management.
Recreation and culture prices rose by 0.4% between May and June, compared with a fall of 0.6% a year ago. The annual inflation rate for this category was 7%, the highest since December 2011.
The main drivers of recreation price inflation were games, toys and hobbies, books, newspapers and stationery, package holidays, cultural services, and equipment for sport and open-air recreation. The ONS said that these increases reflected higher demand from consumers as well as supply constraints due to the pandemic.
What does this mean for the economy?
The lower inflation rate in June may ease some pressure on the BoE to raise interest rates further to curb price growth. The BoE has already increased its benchmark rate to 5% in July, the highest level since April 2008.
However, some economists warn that inflation may not have peaked yet and could rise again in the coming months due to persistent supply chain disruptions, labour shortages, rising energy costs and higher consumer spending.
The BoE expects inflation to reach around 9% by the end of this year before falling back towards its target in 2024. However, it also acknowledges that there is a lot of uncertainty around its forecasts and that it will monitor the data closely to adjust its monetary policy accordingly.
The high inflation rate also poses a challenge for households and businesses, as it erodes their purchasing power and profit margins. This could dampen consumer confidence and economic growth in the UK, which is still recovering from the impact of the pandemic and Brexit.