Britain’s inflation rate has fallen to its lowest level in 15 months, sparking optimism among investors and economists about a potential shift away from the severe price spiral witnessed in the Group of Seven (G7) nations.
Official data revealed that annual consumer price growth significantly cooled to 7.9% in June, down from 8.7% the previous month. This marks the first time in five months that the headline reading has come in lower than expected. Furthermore, underlying pressures have also receded from their highest levels in three decades.
Following the release of the data, markets scaled back expectations for sharp increases in interest rates, ruling out scenarios where the Bank of England (BOE) would need to push borrowing costs close to 7% by the end of this year.
This development comes as a relief for BOE Governor Andrew Bailey and Prime Minister Rishi Sunak, who faced mounting pressure in their efforts to tackle the significant cost-of-living crisis experienced by the nation. It also alleviates the strain on homeowners who were impacted by a sharp surge in mortgage rates, which posed potential political consequences for Sunak.
Samuel Tombs, chief UK economist at Pantheon Macroeconomics, described the figures as “a watershed moment.” He added, “We continue to think that the worst is over for UK households and that the MPC [Monetary Policy Committee] will not need to raise Bank Rate all the way to 6.25%, as markets priced-in yesterday.”
Sunak has placed his economic reputation on the line, pledging to halve the inflation rate by the end of the year ahead of the widely expected general election next year.
While Britain remains an international outlier, with prices still rising nearly four times the BOE’s 2% target, the latest data brings the country closer to its international peers. It also diverges from the eurozone, where core prices experienced a reacceleration in June.
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