FOLLOWING four successive months of inflation surprising to the upside, we finally had one go the other way.
The UK Consumer Prices Index (CPI) eased from 8.7 per cent year-on-year (y/y) in May, to 7.9 per cent in June.
This was better than economists had expected (8.2 per cent), although it was in line with the Bank of England’s (BoE) expectations back in May.
It marks the lowest reading since March 2022, but is still almost four times the BoE’s target rate of 2 per cent y/y.
Incidentally, Northern Ireland’s median wages increased by 7.3 per cent y/y in June.
The recent concern in the inflationary figures has been the core-CPI and services CPI.
The former is viewed as the underlying rate of inflation as it excludes food, energy, alcohol and tobacco which tend to be more volatile.
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Core-CPI was expected to remain unchanged at its 31-yr high of 7.1 per cent in May. Instead the June figure eased to 6.9 per cent. This fall is welcome but remains very high by historical standards.
Getting this rate down will remain a challenge. Food price inflation eased slightly in June but the annual pace of inflation remains very high at 18.7 per cent.
Services CPI is more sensitive to wage pressures and the surge in pay increases has fuelled a rise in services CPI.
As with core-CPI, services CPI eased from its 31-yr high in May of 7.4 per cent to 7.2 per cent. Again a positive development but this remains worryingly high. Meanwhile, goods inflation eased to 8.5 per cent.
Until a couple of weeks ago, financial markets had been pricing in an interest rate peak of 6.5 per cent.
Financial markets have lowered their expectations for the Bank Rate and now expect a peak of 5.82 per cent.
Following today’s figures, it now looks likely for the meeting on August 3, the BoE will raise rates by just 25bps not the 50bps that was expected.
The lowering of inflation expectations has seen significant downward moves on swap rates.
For example, two-year swap rates (which are used to price two-year fixed rate mortgages), have fallen by 21bps in the last 24 hours from 5.76 per cent to 5.54 per cent
So we should see and hear mortgage rates come down a bit in the coming weeks.
Finally, the lowering of interest rate expectations has hit sterling on the currency markets.
The pound was worth $1.29 on Wednesday morning, and had fallen below €1.16.
