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UK inflation eases to 17-month low of 6.8% in year to July

Inflation: People shop at Borough Market in London
Core CPI inflation, which strips out energy, food, alcohol and tobacco, rose by 6.9% in the 12 months -- slightly higher than the 6.8% economists expected. Photo: Anna Gordon/Reuters (Anna Gordon / reuters)

UK inflation has fallen to its lowest level in 17 months, since February 2022 and the start of the Ukraine war, thanks to falling gas and electricity prices.

According to the Office for National Statistics on Wednesday, the Consumer Prices Index (CPI) rose by 6.8% in the year to July, down from 7.9% in June.

This is lower than its peak of 11.1% set last October, but well above the Bank of England’s (BoEs) target of 2%.

On a monthly basis, consumer prices fell by 0.4% in July alone, compared with a rise of 0.6% in July 2022.

The July data was the first to include the new lower energy price cap, which was lowered to £2,074 a year for a typical household, below the government’s energy price guarantee of £2,500 per year.

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Read more: Pound up as UK unemployment and wages rise

"Prices of gas fell by 25.2% between June and July this year, but rose by 0.1% between the same two months a year ago," the ONS said. "Prices of electricity fell by 8.6% between June and July this year but rose by 0.4% between the same two months a year ago."

Hotels and passenger transport by air were the classes that provided the largest offsetting upward contributions to the change in the rate.

Meanwhile, food and non-alcoholic beverage prices rose by 0.1% between June and July 2023, compared with a rise of 2.3% between the same two months a year ago. That pulled the annual rate of inflation for food and non-alcoholic beverages to 14.8% in July, down from 17.3% in the year to June.

Core CPI inflation, which strips out energy, food, alcohol and tobacco, rose by 6.9% in the 12 months — slightly higher than the 6.8% economists expected.

Watch: How does inflation affect interest rates?

Chancellor Jeremy Hunt said: "The decisive action we’ve taken to tackle inflation is working, and the rate now stands at its lowest level since February last year. But while price rises are slowing, we’re not at the finish line.

“We must stick to our plan to halve inflation this year and get it back to the 2% target as soon as possible.”

It came as data on Tuesday showed that basic pay is rising at the fastest rate in at least two decades, with regular wages up by 7.8% in the April-June quarter.

“With inflation falling to 6.8% and yesterday’s data showing wages increased by nearly 8% over the past year, the cost of living crisis may finally be beginning to wane," David Henry, investment manager at Quilter Cheviot, said.

"Households are still under immense pressures however, and inflation isn’t going to fall dramatically, but it will be pleasing to millions to see their take home pay now seeming to keep up with inflation.

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He added: "However, the headline numbers only tell a fraction of the story. Food prices continue to hit consumers, while core inflation is refusing to budge substantially. With the surprise in earnings growth added in and the economy holding up in the face of adversity, the Bank of England will probably determine that more interest rate rises are required to get the job done.”

Meanwhile, Neil Birrell, chief investment officer at Premier Miton Investors, said Threadneedle Street had "no room for complacency" as policy members would have been hoping for a bigger improvement in inflation last month.

"We are not yet at the stage in the UK that we can say that we are winning the battle on inflation, there are too many pressures. It looks like interest rates are on their way up again at the next meeting of the Monetary Policy Committee," he said.

The Bank of England has now hiked the cost of borrowing 14 consecutive times to 5.25%, over a period of more than 18 months, which is traditionally when they begin to bite on the economy.

Financial markets are continuing to bet that the base rate will rise at least 25 basis points in September, before climbing as high as 6pc by the end of the year.

Watch: What is a recession and how do we spot one?

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