Falls in gas and electricity prices led to UK inflation slowing in July, official figures show. Inflation, which measures how prices change over time, fell to 6.8% in the year to July, down from 7.9% in June.
Alongside reductions in energy bills, prices for staple foods such as milk, bread and cereal also eased. While there are signs the cost of living could be easing, prices remain high, putting pressure on businesses and household finances.
Inflation is much lower than it was at its peak of 11.1% in October last year, but it still remains high compared to historical rates.
Wages have been failing to keep up with the rising prices, but there are potential signs of change after figures on Tuesday revealed wages rose 7.8% annually between April and June..
When the rate of inflation falls, it does not mean that prices are coming down, but that they are rising less quickly.
Matthew Corder, deputy director of prices at the Office for National Statistics (ONS), said it dropped due to falling gas and electricity prices last month when a change to the energy price cap, which limits how much suppliers can charge households for what they use, came into force.
He pointed out that although the cost for some food items had eased, food prices are still nearly 15% higher than one year ago.
And the ONS said “core inflation”, which strips out the price of energy, food, alcohol and tobacco, remained unchanged in July at 6.9% – a figure closely watched by the Bank of England, which sets interest rates.
With inflation still more than three times the Bank’s 2% target, many experts expect the UK’s central bank to raise interest rates again in September in a bid to dampen price rises.
The Bank has steadily increased interest rates to 5.25%, the highest level in 15 years, meaning mortgage costs have jumped, but savings rates have also increased.
It hopes that if it makes borrowing more expensive, people will spend less, demand will slow, and prices will not rise as quickly.
Ruth Gregory, deputy chief UK economist at Capital Economics, said with wage growth and services inflation both stronger than the Bank had expected, its decision makers would look to raise rates from 5.25% to 5.5% in September.
Chancellor Jeremy Hunt said July’s figures on the cost of living showed the action the government had taken “is working”.
But he warned “while price rises are slowing, we’re not at the finish line”, reiterating the government’s plan to halve inflation by the end of this year.
Shadow Chancellor Rachel Reeves said inflation in Britain remained “higher than many other major economies”.
“After 13 years of economic chaos and incompetence under the Conservatives, working people are worse off – with higher energy bills and prices in the shops,” she said.
Heidi Karjalainen, a research economist at the Institute for Fiscal Studies said the governments target to halve inflation by the end of this year was “always a little odd as there is only so much the Treasury can do to influence the pace of price increases”.
“When the target was set, the prime minister may have hoped he could rely on falling in energy prices to do most of the work to hit it,” she said.
“However, the stubbornly high rate of price inflation for goods and services other than food and energy has put the target in jeopardy. With only four months to go, it no longer seems at all clear that inflation at the end of the year will have fallen by enough to achieve it.”
