Inflation Expected to Slow After Energy Price Fall

Wednesday, 16 August 2023

The UK's economic landscape has been marked by significant fluctuations, with inflation rates and wage growth being at the forefront of discussions. As businesses grapple with these changes, understanding the broader economic context becomes crucial.

Inflation Predicted to Decelerate in July

Recent data suggests a deceleration in the Consumer Prices Index (CPI) inflation, with projections indicating a rate of 6.7% for July, a decline from the 7.9% observed in June. This slowdown can be attributed to several factors:

1. Energy Price Reductions: The aftermath of the geopolitical tensions following Russia's invasion of Ukraine saw a surge in energy prices. However, July witnessed a moderation in these prices. Specifically, the average price per unit of electricity was reduced to 30p, and gas prices dropped to 8p per unit. This adjustment led to a decrease in the average annual household energy bill, moving from a capped rate of ￡2,500 to ￡2,074.

2. Stabilisation in Food and Core Goods: Industry surveys indicate a slowdown in the inflation rates of food and core goods.

Wage Growth and its Implications

The wage growth scenario presents a contrasting picture. Regular pay growth, excluding bonuses, hit a record 7.8% year-on-year for the quarter ending in June. However, when adjusted for inflation, real wages saw a decline of 0.6%. This disparity between wage growth and inflation has implications for purchasing power and consumer spending.

Furthermore, data from analysts at Kantar highlighted that while the price of groceries has been slowing for five consecutive months up to August 6, the year-on-year increase of 12.7% still outpaces wage inflation.

Bank of England's Response

The Bank of England has been proactive in its approach to manage inflation. The Monetary Policy Committee has consecutively raised interest rates 14 times, positioning the current base rate at a 15-year peak of 5.25%. This aggressive stance is expected to continue, with further rate hikes anticipated in September, irrespective of the inflation figures released by the ONS.

James Smith, a developed markets economist at ING, opines that the Bank's focus will remain on wages and that a September rate hike is highly probable.

Final Thoughts

For businesses, these economic indicators provide insights into consumer behaviour, purchasing power, and potential investment strategies. While the government remains optimistic about curbing inflation, businesses must remain agile, adapting to the evolving economic landscape and making informed decisions to navigate these uncertain times.