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UK Inflation falls to 7.9% - but what does this mean?

The Office for National Statistics revealed that inflation has dropped to 7.9%, but how will this effect the UK economy?

A photo of Grace Lynch, the author

By Grace Lynch

Published on: 24 July 2023

3 min read

UK Inflation falls to 7.9% – but what does this mean?

Current rate of inflation in the UK7.9% (as of July 2023)
Previous rate of inflation8.7%
Bank of England target rate of inflation2%

Over the last few months, we’ve spoken a lot about high levels of inflation and the impact on the UK economy. It was welcome news for the UK last week when it was announced that inflation fell to 7.9% between May – June 2023.

Though this a positive step for the UK, it does mean that prices are on average 7.9% higher than they were this time last year. With the country in a cost-of-living crisis, many people struggling with essential bills and feeding their families with likely feel that inflation isn’t dropping fast enough.

How does UK inflation compare to other countries?

The UK is struggling massively compared to other European countries following the effects of the global Covid-19 pandemic. Other factors that have impacted inflation rates include raised wholesale costs for food and energy, following Russia’s invasion of Ukraine.

The Office for National Statistics reported that the UK experienced it’s highest rate of inflation since 1981 back in October 2022. This rate 11.1%, so it is at least positive to note that current figures represent a significant decrease from this.

Though the UK is moving in the right direction, countries such as Germany, Italy and France have experienced much lower levels of inflation. On average, EU inflation rates have settled at around 5.5%.

Geographic areaRate of inflation (June 2023)
UK7.9%
Germany6.4%
Italy6.4%
Ireland (ROI)6.1%
Europe (average)5.5%
France4.5%
United States4%
Japan3.3%

The main points from the latest release by the Office for National Statistics are:

  • A drop in the prices of petrol and diesel (motor fuel) contributed significantly to the drop in inflation rates
  • UK food prices continue to rise, but rose at a slower rate in June 2023 compared to June 2022
  • Inflation rates are starting to slow as rates of CPIH (Consumer Prices Index CPI including owner occupier housing costs) rose by 0.2% in June 2023 compared to 0.7% in June 2022
  • Core inflation (CPIH excluding tobacco, alcohol, food and energy costs) hit its highest rate in 30 years in May, with a rate of 6.5%
  • There have been downwards effects to the rate of inflation due to price changes for products such as non-alcoholic beverages, food, furniture and household goods and services.

With interest rates and inflation so closely linked, it’s understandable to wonder if this drop in inflation indicates a potential drop in interest rates. The Bank of England raises interest rates as a way to tackle inflation.

The Bank of England’s chief economist Huw Pill has previously stated that the invasion of Ukraine caused unpredicted inflationary shock. This has made it harder for economists to predict inflation and whether further changes to interest rates are necessary.

It’s hard to say for certain, but consistent decreases in inflation can help ease pressure on the UK economy which would allow the Bank of England to decrease its base rate.

However, economic growth is still struggling in the UK, as the higher interest rates and mortgage rates discourage UK shoppers from spending. Downturns in manufacturing orders due to price rises are also significantly affecting UK economic activity.

While this should positively impact inflation, it may prevent interest rates from easing just yet.

In other recent news, chancellor Jeremy Hunt said inflation has led to some businesses attempting to profiteer. He has called for UK regulators (Watchdog) to investigate any firms attempting to exploit rising prices at the expense of consumers.

Related articles

Here, we have more of our recent MPO articles relation to inflation and other finance news in the UK.

Keep up to date with the latest UK financial news here on our MPO News page.

Resources

Financial Times – Global inflation tracker

Office for National Statistics – Consumer Price Inflation, UK: June 2023

Office for National Statistics – Inflation and Price Indices

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