16 August 2023

UK inflation slows to 6.8% as economy faces ‘very real risk’ of recession

16 August 2023

Inflation slowed to its lowest level for 17 months in July due to a fall in energy prices but economists have warned that the UK economy faces a “very real risk” of recession due to higher interest rates.

On Wednesday, the Office for National Statistics (ONS) said Consumer Prices Index inflation was 6.8% in July, down from 7.9% in June.

It is the lowest rate since February 2022.

Nevertheless, it still represents a sharp increase in the cost of living for Britons over the past year and is significantly above the Government’s 2% inflation target.

Economists said that, despite the slowdown, there is still significant pressure on the Bank of England to continue with recent interest rate hikes to drag inflation firmly lower.

Rates are expected to increase from the current rate of 5.25%, which is already a 15-year-high, to 5.5% next month. Financial markets have forecast it could peak around 6% by the start of next year.

The IPPR think tank raised concerns after the latest inflation data that further hikes could force the economy to contract.

George Bibb, head of the IPPR’s centre for economic justice, said: “It’s good news that headline inflation is lower, especially with energy bills coming down, but there is a very real risk that a recession may soon overtake price rises as the main economic concern.

“Other countries have brought inflation under control quicker than in the UK, with more support for households and workers avoiding unnecessary pain.”

Earlier on Wednesday, Chancellor Jeremy Hunt said the easing of inflation shows “the decisive action we’ve taken to tackle inflation is working” but “we’re not at the finish line”.

“We must stick to our plan to halve inflation this year and get it back to the 2% target as soon as possible,” he added.

Prime Minister Rishi Sunak pledged at the start of the year to cut inflation in half, from a level of 10.7%, by the end of 2023.

Economists have most recently forecast that the Government will just achieve this, with the Bank of England currently projecting inflation to be around 4.9% in the last three months of the year.

The latest inflation reading was marginally below expectations, with analysts having predicted a reading of 6.7% for the month.

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.

“Core inflation was unchanged in July, with the falling cost of goods offset by higher service prices.”

The ONS said lower energy prices, which have slumped after volatility sparked by the Russian invasion of Ukraine, were a key driver in the slowdown in inflation.

From the start of July, the average price for each unit of electricity that someone uses was slashed to 30p per unit, while gas prices fell to 8p per unit, meaning the average annual energy bill for a household dropped to £2,074 from the capped rate of £2,500.

Gas prices declined by more than 25% in July against the previous month due to the cap change, while electricity prices were 8.6% lower.

Soaring food inflation also slowed down markedly, contributing to the reduction in the overall inflation rate, but remains near historically high levels.

Food prices increased by 14.9% in July against the same month last year, easing back from 17.3% growth for June.

The fresh inflation data comes a day after the ONS revealed that wages grew at a record pace over the three months to June, with regular pay growth, which excludes bonuses, reaching 7.8% compared with a year earlier.

Nevertheless, wages were still 0.6% lower once inflation for the period was taken into account.

Martin McTague, national chairman of the Federation of Small Businesses (FSB), said: “While a drop in inflation provides some comfort, today’s figures show less of a drop in inflation than hoped for, and will renew fears of a wage-price spiral, and of yet more base rate hikes in future.

“The worry now is that rising wages ignite a fresh wave of inflation in September, which will threaten the momentum from June’s GDP growth.”

James Smith, research director at the Resolution Foundation, said: “Inflation has fallen rapidly over the past six months, but the UK still has the highest rate in the G7 and the Bank faces a daunting task in further taming price pressures.

“Accelerating pay growth will make even the Prime Minister’s promise to halve inflation hard to meet, let alone the Bank’s mandate of reducing it to 2%.”

The latest figures also showed the CPI measure of inflation including housing costs (CPIH) fell to 6.4% from 7.3% in June.

The Retail Prices Index meanwhile slowed to 9% from 10.7% in the previous month. The figure has previously been used to calculate annual train fare increases but the Government has confirmed that the next increase will be below this RPI rate.

The best videos delivered daily

Watch the stories that matter, right from your inbox