Small steps forward: UK inflation rate drastically drops to 6.8%
The Office of National Statistics (ONS) have revealed that a sharp drop in energy prices have caused inflation rates to fall to their lowest level in over a year.
This morning Brits braced themselves for yet more disappointment regarding inflation rates, however, they were finally met with some good news. Figures revealed by the ONS have displayed inflation levels fell to 6.8% in July from 7.9% in June.
One of the reasons rates fell so significantly was the drop in energy prices over the past year led to the smallest increase in the cost-of-living since February 2022.
ONS deputy director of prices, Matthew Corder, said: ‘Inflation slowed markedly for the second consecutive month, driven by falls in the price of gas and electricity as the reduction in the energy price cap came into effect.
‘Although remaining high, food price inflation has also eased again, particularly for milk, bread and cereal.’
However, despite the large fall in the consumer price index (CPI), the government’s preferred measure of inflation, analysts warned the outlook was not improving rapidly enough to prevent further interest rate increases from the Bank of England.
Ruth Gregory, a UK analyst at Capital Economics, said the increase in service sector inflation coupled with strong wage growth meant the Bank was likely to press ahead with another 0.25 percentage point rise in interest rates from 5.25% to 5.50% next month.
Against this backdrop, the decrease in CPI means prices are increasing less rapidly than wages, which have risen at a record annual pace as official figures which were announced yesterday displayed regular pay grew by 7.3% in the March to May period from a year earlier.
In spite of this, the ONS did deliver less encouraging news in regard to core inflation, which excludes energy and food prices. The ONS said this remained the same at 6.9%. Service sector inflation, which is monitored by Threadneedle Street as an indicator of domestically generated price pressure picked up from 7.2% to 7.4%.
‘The current inflationary environment, coupled with the Bank of England’s announcement of an interest rate rise to 5.25% and an inactive IPO market, has created a multifaceted challenge for businesses,’ Claire Trachet, CEO of business advisory Trachet, said. ‘Inflation’s complex influence on everything from the cost of capital to asset valuations is causing companies with limited cash reserves to find it increasingly difficult to secure funding.’
Claire added: ‘The immediate effect is an expected increase in down rounds in the coming year, with companies having to make difficult decisions and give up larger portions of their equity to raise the same amount of cash.
‘Yet, there’s a silver lining. A growing number of investors who have paused investments due to uncertainty in 2022 and H1 of 2023 are sitting on dry powder piles. This indicates significant opportunities on the horizon towards the end of this year and beginning of 2024.’
Image: zibik
Bank of England’s path of pain: Interest rates expected to remain high