UK sees biggest six-month inflation fall in over three decades – but Bank still faces big battle to tame price pressures

CPI inflation fell to 6.8 per cent in July – down from 7.9 per cent in June and 10.1 per cent in January – making it the sharpest six-month fall in inflation since September 1992. But UK inflation remains higher than elsewhere, and the Bank of England faces a tough task in taming it amid accelerating pay growth, the Resolution Foundation said today.

The latest inflation data was in line with the Bank’s forecast from its recent Monetary Policy Report – with the fall driven by a sharp fall in energy bills (the price cap fell to £2,074 in July) and a welcome easing in food price inflation (although prices are still rising).

Monetary policy makers will be concerned however that core inflation remained at 6.9 per cent and services inflation – a key indicator of inflationary pressure for the Bank of England – increased to 7.4 per cent in July, from 7.2 per cent in June. This chimes with the news yesterday that pay growth has accelerated to reach its highest level on record and is likely to further upward pressure on prices.

The Foundation notes that continued high food inflation (14.9 per cent) means that the average food bill has now increased by £960 since 2019-20, overtaking the increase in the average energy bill (£910) for the first time. Poorer households are disproportionately affected by these drivers of the cost of living crisis as they spend more of their budgets on these essential items.

Despite recent falls, the UK still has the highest inflation rate in the G7, and the second highest among OECD advanced countries that we currently have comparable data for, with only Iceland having higher inflation in July.

Looking at longer-term price pressures, the Foundation notes that the UK has experienced the third largest rise in price levels since July 2019 among OECD advanced economies at 21.1 per cent, behind only Iceland and Austria.

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 per cent.

“The UK has experienced the third largest price pressures of any advanced economy since the pandemic. This highlights just how painful this cost of living crisis continues to be, and how unwise it would be to meddle with policies like benefits uprating that are designed to protect families from price pressures like this that are beyond their control.”