Inflation in the UK fell to 7.9 per cent in the year to June, down from 8.7 per cent in May and the lowest rate in 15 months.

Analysts had forecast a drop to 8.2 per cent.

On a monthly basis, the Consumer Prices Index rose by 0.1 per cent in June, compared with a rise of 0.8 per cent in June 2022, according to the Office for National Statistics.

Core inflation, which excludes items such as energy, food and tobacco, rose by 6.9 per cent in the year to June, down from 7.1 per cent in May, which was the highest rate since March 1992.

Falling prices for motor fuels provided the largest downward pressure on the inflation figures.

Petrol and diesel prices fell 22.7 per cent in the year to June, compared with a fall of 13.1 per cent in May. The average price per litre of petrol in June was £1.43 ($1.84) . In the same month last year, the average price per litre of petrol was £1.84.

Although food prices rose again in June, it was by less than in the same month last year.

The annual rate of food price inflation was 17.4 per cent in June 2023, down from 18.4 per cent in May and lower than the 45-year peak of 19.2 per cent it reached in March 2023.

“Inflation is falling and stands at its lowest level since last March; but we aren't complacent,” UK Chancellor Jeremy Hunt said.

Stuart Cole, chief macro economist at Equiti told The National: “It is the fall in the core rate that will probably be most welcomed by the Bank of England, given that since March it has been steadily climbing higher, despite the policy tightening the Monetary Policy Committee has delivered.

“Today’s numbers will allow the Bank of England to claim that its aggressive stance is finally starting to yield results.”

'Still work to be done'

Economists are now wondering if the larger-than-expected fall eases the pressure on the Bank of England to keep aggressively raising interest rates, after 13 consecutive rate rises since December 2021.

“In normal circumstances, this could signal an easing monetary policy from the Bank of England with inflation moving in the right direction, but with the 2 per cent target in mind, this latest release represents victory in one battle, but not the war,” said Richard Hunter, head of markets at Interactive Investor.

In that war against inflation, not all are convinced the current numbers have fallen enough for the Bank of England to review its monetary tightening policy.

“Despite the data showing that the battle against inflation in the UK is being won, we expect the Bank of England will confirm it’ll continue with its aggressive interest rate hiking agenda at the monetary policy meeting on August 1,” said Nigel Green, chief executive at the financial consultants deVere.

“Although the consumer price index fell to 7.9 per cent last month, amid lower petrol prices and a slowdown in the pace of growth for food, beverages and other basics, the central bank officials will likely argue that there is still work to be done.

“We believe the bank will insist that although inflation is certainly coming down, it is doing so very, very gradually. It remains sticky – still the highest in the G7 – and a long way from the 2 per cent target.”

Jeremy Batstone-Carr at Raymond James in London agrees that while the June figures did not deliver any “nasty surprises”, prices are still “too elevated for the Bank of England to sit back and relax”.

At 7.9 per cent, UK inflation is still way above the Bank of England's 2 per cent target, but significantly below the 11.1 per cent 41-year high it hit last October.

So, when the Monetary Policy Committee at the Bank of England decides on the next move in interest rates in early August, analysts are divided on predictions of a 0.5 per cent raise or a smaller 0.25 per cent increase.

“I think the BoE could justify [either] move,” Mr Cole at Equiti told The National.

“Nobody would criticise it for only going for a 0.25 per cent rise, particularly given that the impact of the monetary tightening delivered to date is yet to be fully felt.

“But the MPC will be acutely aware of the strong wages growth numbers we saw last week and may decide that a 0.5 per cent hike is therefore justified, if only as an insurance policy to ensure that CPI does not start creeping higher again, akin to what happened with the core reading this year.”

Signals from the elements of the derivatives markets that closely watch the meetings of the Bank of England have reduced the chances of a 0.5 per cent increase in interest rates in early August to 50 per cent.

The inflation figures “are likely to make the bank think twice about a second consecutive 0.5 percentage point hike when its Monetary Policy Committee meets”, Dr Mohamed El-Erian, economic adviser at Allianz and president of Queens’ College, Cambridge told The National.

“Indeed, the data release has already prompted traders to reprice the future interest-rate curve in favour of 0.25 percentage points.”

Longer term, the money markets are also pricing in a peak for interest rates at 5.9 per cent, compared with a prediction of over 6.5 per cent earlier this month.

Pound down

In response to the inflation numbers, the pound was down 0.8 per cent at $1.2927 against the US dollar, while the euro rose more than 0.7 per cent against sterling to 86.82 pence.

“Profit taking in sterling as a result should not be a surprise as we expect gilt yields to come down versus US treasuries and bonds,” said Kenneth Broux, head of corporate research FX and rates at Societe Generale in London. “The pound was overbought after the run-up in recent weeks.”

Meanwhile, shares in Britain's big housebuilders rose on the back of adjusted future interest-rate expectations.

Shares in Crest Nicholson soared by 7 per cent by mid-morning on Wednesday, while those in Barratt Developments and Taylor Wimpey were more than 5 per cent higher.

"Sentiment surrounding housebuilders has been hinging on the direction of inflation and interest rates, and concerns that affordability is being sideswiped as mortgages become much more expensive, so any signs that homeowners might show more resilience is being welcomed," said Susannah Streeter at Hargreaves Lansdown.

Households still suffering

Even though the figures show the 13 rises in interest rates may be starting to have an effect on sticky inflation, prices rising at 7.9 per cent will come as scant comfort to already embattled household budgets.

“Relief that the numbers finally seem to be going in the right direction will be short lived for policymakers and politicians who understand that the average household won’t care about cooling inflation, they just want prices to go down, and with one or two exceptions we’re still a fair way away from that,” said Danni Hewson, head of financial analysis at AJ Bell.

For Alice Haine, personal finance analyst at Bestinvest, falling inflation is “good news”, but consumers should remember that “a typical basket of goods is still almost 8 per cent more expensive than it was a year ago”.

“With rate rises still on the cards, some households face significant financial pain when their fixed-rate mortgages mature, and they have to absorb alarmingly higher repayments.

“The cost-of-living crisis is now being overtaken by a cost-of-borrowing crisis, with mortgages taking the lead as the major personal finance concern of the moment,” Ms Haine added.

For some, any chance that the Bank of England's interest rate gallop might be reined in slightly will be good news for mortgage holders.

“I’m going out on a limb here to say fixed mortgage rates have peaked,” said Lewis Shaw, founder of the mortgage broker Shaw Financial Services.

“We may see a little shuffling around but the continued painful increases are over.

“That doesn’t mean that we’re out of the woods because monetary policy takes a long time to show up. However, it does mean we can now start to see the faint glimmer of a light at the end of the tunnel.”

Others are more cautious.

“If this is a trend, then we should start to see some easing of pricing, but let's not get too carried away just yet,” said Jonathan Burridge, founding adviser at We Are Money.

“Inflation is still too high, so the Bank of England's rate policy is unlikely to change and traders have responded ahead of this news, so any adjustment will be slow and incremental.”

Overall, many analysts pointed out that while the fall in the inflation numbers is not bad news for households, there is little to be positive about.

“While it is positive to see inflation falling, it remains stuck above 7 per cent for the 16th consecutive month," said Ben Harrison, director of the Work Foundation at Lancaster University.

“This is prolonging the living standards squeeze that has been a particular disaster for the 6.2 million people in severely insecure work.

“These latest inflation figures will put the Bank of England under pressure to keep interest rates high. Any further mortgage and rent hikes could be a hammer blow for those stuck in insecure and low-paid work.”