Inflation in the UK has witnessed a notable drop, declining to 6.8% in the year ending July, down from 7.9% in June.

This marks the second consecutive month of substantial reduction and brings inflation to a 15-month low.

Main Factors Contributing to the Decline of Inflation

The latest drop in inflation can be attributed to multiple factors. A decrease in the energy price cap and a slower rise in food costs, particularly for items like milk, bread, and cereals, played a significant role. However, despite these improvements, the UK's inflation rate remains notably higher compared to many other countries and significantly above the Bank of England's 2% target rate.

Why is Inflation Still High?

While there have been improvements, certain factors are maintaining high inflation levels. The escalating costs of hotels, air travel, and rents continue to exert upward pressure on the inflation rate, according to the Office of National Statistics (ONS). Consequently, the Bank of England is expected to raise interest rates next month as part of its efforts to curb inflation.

Some Key Inflation Figures

The Consumer Prices Index including owner-occupiers' housing costs (CPIH) saw a rise of 6.4% in the 12 months leading to July 2023, down from 7.3% in June. On a monthly basis, CPIH witnessed a decrease of 0.3% in July 2023, in contrast to a 0.6% rise in July 2022. Similarly, the Consumer Prices Index (CPI) recorded a 6.8% increase in the 12 months up to July 2023, down from 7.9% in June. On a monthly basis, CPI declined by 0.4% in July 2023, compared to a 0.6% rise in July 2022.

Falling Gas and Electricity Prices Contributed Significantly to the Reduction of Inflation

The downward trend in inflation can be attributed to various factors. Falling gas and electricity prices contributed significantly to the reduction, with gas prices falling by 25.2% between June and July 2023, marking the most substantial decline recorded since 1988. Electricity prices also fell by 8.6% during the same period. These reductions collectively contributed to a decrease in the annual rate of inflation.

Inflation rates for housing, water, electricity, gas, and other fuels witnessed a decline. The annual inflation rate for these costs stood at 5.4% in July 2023, down from a peak of 11.8% earlier in the year. Similarly, the CPI inflation rate for the same category was 6.8% in July 2023, down from a peak of 26.7% earlier in the year. This decline can be attributed in part to the lowering of the Office of Gas and Electricity Markets (Ofgem) price cap in July 2023.

Maintaining Price Stability While Supporting Economic Growth

The recent decline in UK inflation, while positive, highlights the persistence of certain inflation-driving factors. While energy prices have notably decreased, other elements such as rising costs in hotels, air travel, and rents continue to exert upward pressure on inflation. This complex inflation landscape suggests that the Bank of England's interest rate hike next month is geared toward addressing this lingering issue.

The UK's inflation trajectory underscores the challenges in maintaining price stability while supporting economic growth. As inflation dynamics continue to evolve, effective monetary policy measures and regulatory responses will be essential to strike the right balance between controlling inflation and supporting economic recovery.