Lower Than Expected Inflation Fuels Narrative That We Are Through The Worst

Martin Sartorius, CBI Principal Economist, said:

Inflation fell more sharply than expected in June, which will enable Bank of England policymakers to breathe a sigh of relief following last month’s upside surprise.

However, CBI survey data continue to point to persistence in domestically-driven price pressures, particularly in the services sector, and many businesses report that the labour market remains very tight.

It’s still likely that the Bank will raise rates higher in their next meeting and keep a tighter policy stance going forward to ensure inflation continues to head sustainably back towards its target.

Kitty Ussher, Chief Economist at the Institute of Directors, said: “This very welcome fall in the headline rate of inflation is predominantly driven by petrol prices that fell in June, plus food prices not rising as fast as they did a year ago. We’re also seeing less price pressure in the sale of manufactured goods.

“However, core inflation has only eased slightly. The Bank of England will also be concerned that inflation in the services sector is proving relatively persistent.

“The main story today is that inflation is lower than expected, fuelling a narrative that we are through the worst. The Bank of England will hope that this will cause business leaders and others to lower their expectations of future inflation, which could then become self-fulfilling.”

Editorial and Research Fellow at the free market think tank the Institute of Economic Affairs, Professor Len Shackleton, said:

"If last month’s 8.7 per cent annual increase in the CPI was unexpectedly high, this month’s 7.9 per cent is a shade lower than expected. This is mirrored in other indicators such as CPIH and core CPI.

"Since these figures were tallied, Russia has ended a deal to allow grain exports from Ukraine, which will likely push up global and UK food prices. Mortgage rates have also gone up. Nevertheless, since the extraordinary increases in the money supply that ultimately fuel inflation have ended, inflation is set to fall further.

"Rishi Sunak’s pledge to halve inflation by the end of the year may still be optimistic, but at least there are no grounds for the Bank of England to raise interest rates further. Nor are there any grounds for panic measures to hold down prices artificially, such as Grant Shapps’ silly initiative to curb supermarket petrol prices."