UK economy: Inflation comes in below 8 per cent in June

June'sinflationfigure marked a better-than-expected retreat of the Consumer Price Index (CPI), after it rose 8.7 per cent in May; it had been predicted to fall to 8.2 per cent.

Oliver Rust, head of product at independent inflation data-aggregator truflation claimed the real level of inflation sat at 11.56 per cent.

He warned that prices will remain elevated until at least September and predicted the Bank of England would raise interest rates by 50bps at its next meeting in August.

There is also the potential for a state pension boost next year as price pressures are set to trigger the triple lock into another big increase.

The increase to the 2024-25 State Pension will be taken from the year-to-September CPI figure.

State pension and government spending

David Pye, director at Broadstone said: "A recent OBR report estimated that spending on the state pension in Great Britain, not including Northern Ireland, is expected to be £124bn in the current financial year and warned that state pension spending is expected to be £23bn in today’s terms higher, or 0.8 per cent of GDP. in 2027-28 than at the start of the decade."

He added: “After benefitting from around a £1,000 increase to the state pension this year, retirees look set for another multi-hundred-pound boost as high inflation persists.

“It looks likely that the state pension will rise above £11,000 next year which will further embed its importance as the foundation of pensioners’ income. At this current rate of increase, it won’t be long before retirees start tripping over the £12,500 income tax threshold solely based on the State Pension.

Rust said: "It appears the Bank of England’s latest aggressive interest rate hike had the desired effect."

Inflation and cost of living

"The sectors helping drive inflation lower last month were motor fuel and food, down 22.7 per cent and 0.8 per cent compared to a year ago, respectively. However, inflation continues in the housing costs, communications and clothing categories, up by 0.2 per cent, 0.4 per cent and 0.2 per cent compared to June 2022, respectively.

Pye also said despite the latest drop in ONS data UK CPI remained closer to 10 per cent than the BoE’s two per cent target. 

"Given the inflation momentum, the central bank has no choice but to keep hiking to bring inflation under its five per cent target for the end of the year, despite today’s good news. We therefore expect another 50bps rate hike at its meeting in August, followed by a potential slowdown for the rest of the year.

This spells further pain for UK consumers who are already stretched to breaking point. And unfortunately, our research suggests that it will be a while yet before inflation finally begins to subside. We don’t anticipate any easing until September at the earliest. 

Job market

Even then, we expect the impending recession – rather than monetary policy – to dampen price growth.

The consultancy said it was keeping a close eye on the labour market, which remains tight with unemployment at 3.9 per cent.

"However, we expect this to begin rising in the foreseeable future, which will hit the UK stock market hard and eventually lead to an easing of inflationary pressures."

Hard summer

In the short term, however, Brits are facing a long, hard summer as schools break up for the holiday, with many households unable to afford their usual breaks. With the average two-year mortgage rate now at 6.7 per cent – the highest level since 2008 – a true affordability crisis is looming. Consumers must brace for more pain ahead as the UK continues to battle a prolonged, painful war against inflation.”

 “However, with government finances under pressure, the soaring cost of the state pension triple-lock will raise further questions around its long-term viability. A demographic bomb is soon to hit with a significant number of baby boomers approaching retirement which will ratchet up the State Pension’s cost to the taxpayer’s public purse.”