June Inflation Holds at Bank of England’s 2 Percent Target

A shopper walking through the aisle of an unidentified Tesco supermarket in England on Sept. 3, 2022. (PA)

Inflation remained unchanged in June, aligning with the Bank of England’s 2 percent target for the second consecutive month, according to official data.

The stability of the price growth follows a period of elevated inflation rates that had impacted households due to rising food and energy prices. Currently, inflation remains well below its recent annual peak of 11.1 percent in October 2022.

The Office for National Statistics (ONS) reported that while the headline rate held in June, there were some fluctuations in specific sectors.

Prices for restaurants and hotels grew by 0.9 percent between May and June. The ONS said that hotels drove the rise in the annual rate, accounting for a monthly rise of 8.8 percent.

Hotel prices grew strongly while second-hand car costs fell but by less than this time last year.

“However, these were offset by falling clothing prices, with widespread sales driving down their cost,” said Grant Fitzner, chief economist at the ONS.

The monthly rate in clothing fell by 1.2 percent, compared to a 0.2 percent rise a year ago. The annual rate was 1.6 percent, compared with a rise of 3.0 percent in the year to May.

Mr. Fitzner also reported a monthly fall in the cost of both raw materials and goods leaving factories, while factory gate prices remained above where they were a year ago.

Caution

Despite the headline inflation rate meeting the BoE target, core inflation, which excludes food and energy prices, held at 3.5 percent.

Inflation in the services sector, closely watched by the BoE, remained at 5.7 percent. Price increases in services are largely driven by wages, which in June recorded strong growth results. This can affect services inflation, keeping it elevated in the near term and posing an upward pressure to headline inflation.

According to the National Institute of Economic and Social Research (NIESR), elevated core and services inflation could pose a challenge for BoE, who may “exercise some caution” when setting interest rates.

Last month, the bank kept the interest rate at 5.25 percent and said that its monetary policy will remain restrictive for as long as it takes for inflation to “sustainably” remain at the 2 percent target.

NIESR expects inflation to rise throughout the rest of the year due to base effects, before falling back towards target in 2025. Forecasts of fluctuating inflation could prompt the bank’s Monetary Policy Committee (MPC) to withhold interest rate cuts at its next meeting on Aug. 1.

According to the principal economist at the Confederation of British Industry, Martin Sartorius, the MPC is “likely to move carefully as they assess the impact of the first rate cut in four years.”

He also noted that many households have yet to feel the benefit of lower inflation due to the high cost of food and energy.

Businesses and households, struggling with high borrowing costs, would welcome the relief of interest rate cuts next month, said Mr. Sartorius.

Economic Inheritance

Compared to other European countries, UK inflation was below France’s (2.5 percent) and Germany’s (2.5 percent) in the 12 months to June.

The shadow leader of the House of Commons, Chris Philp said that with the UK growth topping the G7 list so far this year, the new government “has a great economic inheritance” and no “excuse for tax rises.”

June inflation figures are the first to be released since the Labour Party formed a new government at the beginning of this month.

Chief Secretary to the Treasury Darren Jones welcomed the news of inflation at BoE’s target, but acknowledged that prices remain high across the country.

“We face the legacy of 14 years of chaos and economic irresponsibility. That is why this government is taking the tough decisions now to fix the foundations so we can rebuild Britain and make every part of Britain better off,” said Mr. Jones.

PA Media contributed to this report.