Inflation in the UK has slowed faster than expected to 2.6% in June, according to the Office for National Statistics, driven largely by a drop in motor fuel and food prices. The figure undershot economists’ forecasts of 2.7% and marks a welcome reprieve from the 2.8% recorded in May.
Grant Fitzner, chief economist at the ONS, said: “Food prices fell this month, driven by products including chocolate, margarine and beef. Clothing prices also fell with the start of summer sales, with bigger discounts than last year.” The cost of raw materials dipped for the first time since January, mainly due to the lower price of crude oil, while the increase in the costs of goods leaving factories slowed again.
“UK inflation drops to 2.6%, but oil price rises and Wetherspoon's profit warning temper optimism.”
But the broader picture is more cautious. Oil prices are continuing their upward march, with Brent crude rising 2.7% to $93.46 a barrel on Tuesday morning as the US military completed its 11th night of strikes on Iran. George Brown, senior economist at Schroders, warned: “Lower fuel prices applied the brakes to inflation in June, but this rear-view mirror picture doesn’t tell us much. With oil prices rising again amid renewed tensions in the Middle East, there could be inflation issues further down the road.”
Brown added that the Bank of England’s critical question is whether this remains an energy shock or becomes a domestic inflation problem. “So far, a cooling labour market suggests there is little risk of the sort of second-round effects that would warrant tighter monetary policy,” he said. Markets are pricing more than two rate hikes over the next year, but Brown believes the Bank can stay on hold while it assesses whether the latest energy shock is temporary or persistent.
The slowdown in inflation will likely be welcomed by the new government, as Andy Burnham promises to provide more cost of living support. However, the fragile economic climate is already taking a toll on high-street names. JD Wetherspoon shares slumped after the pub chain issued its fourth profit warning this year, grappling with surging food and energy costs and a rising business rates bill. Founder and chairman Tim Martin said: “Profits for the year are likely to be below market expectations, with marginally lower sales than anticipated in the final quarter, combined with higher costs in the areas of food, labour, repairs, energy and business rates.”
The juxtaposition of cooling headline inflation with persistent cost pressures highlights the uneven nature of the recovery. While consumers may feel some relief at the petrol pump, businesses like Wetherspoon continue to struggle, and the risk of a renewed spike in inflation remains very much alive.