The Consumer Prices Index (CPI) measure of inflation fell 1.1 percentage points from the 7.9 per cent recorded in the year to June.
According to the Office for National Statistics (ONS), the figure was down owing to falling gas and electricity prices.
Food prices remain elevated and while they are still rising, they’re increasing at a slower pace.
The ONS stated that the slowdown in the annual rate between June and July 2023 was a result of prices falling by 0.3 per cent on the month compared with a rise of 0.6 per cent a year earlier.
Hotels and flight spending provided the largest offsetting upward contribution to the change in the rate.
While this will provide some relief to shoppers, core inflation which excludes volatile food, energy, alcohol and tobacco prices remained at 6.9 per cent in the year to July.
What does this mean for interest rates?
Inflation is cooling but it’s still a long way from its 2 per cent target. While it seems the Bank of England’s monetary policy is working – 14 consecutive base rate (interest rate) hikes from 0.1 per cent in December 2021 to 5.25 per cent now in a bid to combat soaring inflation – there is a lag to its desired effect.
Marc O’Sullivan, head of investments at financial mutual, Wesleyan, said: “Monetary policy operates with a long time-lag so we believe the Bank of England will eventually pause its sequence of consecutive rate rises in the coming months, not least to monitor the impact that higher interest rates will be having on the consumer and therefore the economy.”
However, analysts suggested that yesterday’s record wage growth of 7.8 per cent – a higher figure than the falling inflation figure could mean it keeps inflation elevated for longer.
Giles Coghlan, chief market analyst, consulting for HYCM, said: “In theory, rising GDP and falling inflation figures should be good news for the UK economy. However, other indicators show that the UK’s inflation fever shows no signs of breaking soon.
“Although the headline rate of inflation has declined to 6.8%, the latest data suggests that strong wage growth is likely to keep inflation elevated – not to mention more persistent – in the coming months. The Chancellor has already forewarned that wage growth and an uptick in clothing prices could see inflation rebounding again in August, tempering any optimism that today’s release may produce.”
This is echoed by Jatin Ondhia, CEO of Shojin, who said: “It’s good news today, but there are strong rumours that next month’s data will show a rise in inflation once again. This story is far from over. Rishi Sunak and Jeremy Hunt’s target of bringing inflation under 5% by the end of the year is looking increasingly out of reach, and that will have implications on consumers, investors, businesses and the financial markets.
“Inflation remains too high, and if indeed it does start to rise again in the final months of the year, we have to expect the Bank of England to come hard with more interest rates hikes. As borrowing becomes more expensive, this will inevitably further impact house prices and property development.”
