Responses to today's inflation figures for July

Inflation: Unite boss says “Workers won’t be fooled” as cost-of-living crisis continues

Despite triumphant claims in some quarters that the cost-of-living crisis is coming to an end, the truth is that inflation (RPI) is still outstripping wage growth.

As people continue to be hammered by food and energy greedflation, they now face huge rises in rent and mortgage costs thanks to Bank of England interest rate rises.

Meanwhile, corporations continue to profit. The big four banks have published combined profits of over £29 billion for the first six months of 2023, up 77% on last year.

Unite General Secretary Sharon Graham said: “The government, the Bank of England, and profiteering corporations will try to use today’s inflation figures to tell people the crisis is over, but workers won’t be fooled while they see prices and profits continue to rise faster than wages.” 

“Until policy-makers stop attacking wages and take on the corporate profiteers there will be no end to this cost-of-living crisis.”

Which? statement

Sue Davies, Which? Head of Food Policy, said:

“The rate of inflation might be slowing but food prices at the supermarket are still going up at an alarming rate, which is really hitting shoppers in the pocket. Even essentials that have seen price cuts in recent months like milk, butter and cheese are around a third more now than they were two years ago.

“Supermarkets have the power to ease the huge pressure faced by shoppers, especially families and those on low incomes, by putting budget range items in hundreds of more expensive convenience stores. Which? research has found that these stores rarely, if ever, stock the cheapest products."

Inflation down but recession risk now high, IPPR warns 

The UK’s leading progressive thinktank, IPPR, has responded to today’s figures on CPI inflation for July. 

Dr George Dibb, head of IPPR’s Centre for Economic Justice, said:  

“It’s good news that headline inflation is lower, especially with energy bills coming down, but there is a very real risk that a recession may soon overtake price rises as the main economic concern. Other countries have brought inflation under control quicker than in the UK, with more support for households and workers avoiding unnecessary pain.  

“Interest rate hikes take up to a year and a half to fully filter through to the economy. One year from now, ‘pass the parcel inflation’ might be over, but further interest rates might also have killed the recovery - there are already signs of falling consumer confidence and rising unemployment.  

“Even today it’s important to note that while inflation might be falling, prices are not. Households are still struggling with high prices, especially those on the lowest incomes. By supporting households and businesses with energy costs, making businesses play their part, and supporting renters, countries like Spain have shown that inflation can be brought down without the economy going into tailspin.” 

‘Prices still high, budgets still stretched’ despite fall in inflation - Money Advice Trust

The Office for National Statistics has today published its latest Consumer Prices Index, which shows the rate of inflation was 6.8 percent in the 12 months to July 2023, down from 7.9 percent in June.

Joanna Elson CBE, chief executive of the Money Advice Trust, the charity that runs National Debtline and Business Debtline, said:

“This fall in the rate of inflation is an early sign that the relentless pressure of rising prices is beginning to ease.  Our hope is that this is the case, but the reality for millions of people is that they are far from out of the woods. Prices are still high, budgets are still stretched and millions are struggling to cope.

“Ensuring there are safe routes out of debt for those most severely affected by the cost of living is now vital.  I would urge the Government to remove barriers preventing people accessing debt solutions, including reducing or waiving fees for debt relief orders and bankruptcy.

“Anyone worried about their finances should contact National Debtline as soon as possible.”

IFS: Stubborn inflation puts PM's target in jeopardy

Heidi Karjalainen, a Research Economist at the IFS said: "The Prime Minister's target to halve the rate of inflation by the end of the year was always a little odd as there is only so much the Treasury can do to influence the pace of price increases. When the target was set, the Prime Minister may have hoped he could rely on falling in energy prices to do most of the work to hit it. However, the stubbornly high rate of price inflation for goods and services other than food and energy has put the target in jeopardy. With only 4 months to go, it no longer seems at all clear that inflation at the end of the year will have fallen by enough to achieve it."

Read the new IFS briefing here or below.

In January of this year, the Prime Minister, Rishi Sunak, set out his five priorities for 2023, one of which was halving inflation. The Consumer Price Index (CPI) inflation in November 2022 (latest data available to Mr Sunak in January) was 10.7%, implying a target rate of 5.4%. We assume that the aim is to reach this inflation rate in December 2023. In November 2022 The Bank of England had forecast CPI inflation in the last quarter of 2023 to be 5.2%, just below the target rate. 

The Office for National Statistics (ONS) announced today that the CPI inflation rate for July 2023 was 6.8%. This is the lowest rate since early 2022, which is of course good news for the Prime Minister – but it remains 1.4 percentage points above target. Will these trends continue and allow the Prime Minister to claim success?

While there is a great deal of uncertainty, some price changes in the coming months are more predictable than others. The biggest driver of the big swings in inflation has been the big changes in energy prices. The Ofgem tariff cap was set at £3,549 in October 2022, but the price consumers faced was the energy price guarantee of £2,500. Cornwall Insights has a good track record when it comes to predicting Ofgem’s energy price caps. Their latest predictions show that the energy price cap returning to around £1,970 in October 2023, leading to significant negative energy inflation for the end of the year. These changes would knock 4 percentage points (ppt) off the annual inflation rate in December 2023 relative to last November, getting the Prime Minister most of the way towards his objective.

There may also be welcome news from other categories of spending with volatile prices. Food prices have stabilised over the last couple of months – and stable prices mean that their contribution to the rate of inflation (the increase in prices) will fall. If these prices continue their recent trends, this will mean that inflation in December is a further 0.8 percentage points lower than it was last year.

Notes: The bars indicate the negative contribution from food, electricity and gas inflation on the December 2023 inflation rate, compared with November 2022 rate. Food inflation for December 2023 assumes month-on-month inflation rate for food and non-alcoholic beverages of 0.38% from July to December (in line with the rate of change from May to June).

Source: Authors’ calculations using CPI inflation data from the ONS and Cornwall Insight forecast of Q4 2023 Ofgem tariff caps from 27^th July 2023.

If price rises for other goods and services also remain stable, this will be almost sufficient for the Prime Minister to meet his inflation target. Much therefore depends on what happens to goods and services excluding food and energy prices (so-called core inflation). Core inflation has remained stubbornly high since the end of the last year, when it was 6.3%. The most recent figures for July show it is now 6.9%. The prognosis for core inflation looks mixed. On the one hand, producer prices for goods are now increasing much more slowly than consumer prices and we might expect this to start to feed through into lower consumer prices in the months ahead. On the other hand, rapid wage growth in the private sector could push core inflation rates upwards. After months of falling petrol prices average fuel prices have also been increasing in recent weeks.

Thus, with only four months left to go, meeting the Prime Minister’s target looks far from the almost foregone conclusion than it looked like when it was set back in January. The progress that has been made is mainly due to the fact that commodity and energy prices are no longer increasing at the rates they were last year. The challenge is that core inflation remains stubbornly high, and considerably higher than was expected back at the start of the year.

The Prime Minister has never really had much in the way of levers to pull to bring inflation down. Interest rate setting is the preserve of the independent Bank of England, and rate changes famously only affect the economy with “long and variable lags”. Small changes in tax rates could help here and there. But they are unlikely to bring down inflation rates quickly and substantially enough to make much of a difference by December, and in any case tax rates should not be fiddled with simply to meet some arbitrary target.

Setting the target in the first place was always a bit of a gamble. With only limited time left it looks like considerably more of a gamble than it first appeared.

TUC – UK economy is “far from out of the woods”

Commenting on today’s (Wednesday) reduction in CPI inflation to 6.8 per cent - that has been driven by falling gas and electricity prices - TUC General Secretary Paul Nowak said:

“We all want to see lower inflation. But it will take more than price rises slowing for working people to feel better off – especially with food bills remaining sky high.

“Real wages are still worth less today than in 2008 after the longest pay squeeze in 200 years.  And at the same time, unemployment and insecure work are shooting up.

“Our economy is far from out of the woods – too many long-run challenges remain unaddressed.

“We need a credible plan to deliver decent well-paid jobs across the country. The Conservatives have yet to produce one despite being in office for the past 13 years.”

ONS labour market figures published yesterday revealed a 109,000 rise in unemployment and a record number of workers (1.2 million) on zero-hours contracts.

UK sees biggest six-month inflation fall in over three decades – but Bank still faces big battle to tame price pressures - Resolution Foundation

CPI inflation fell to 6.8 per cent in July – down from 7.9 per cent in June and 10.1 per cent in January – making it the sharpest six-month fall in inflation since September 1992. But UK inflation remains higher than elsewhere, and the Bank of England faces a tough task in taming it amid accelerating pay growth, the Resolution Foundation said today.

The latest inflation data was in line with the Bank’s forecast from its recent Monetary Policy Report – with the fall driven by a sharp fall in energy bills (the price cap fell to £2,074 in July) and a welcome easing in food price inflation (although prices are still rising).

Monetary policy makers will be concerned however that core inflation remained at 6.9 per cent and services inflation – a key indicator of inflationary pressure for the Bank of England – increased to 7.4 per cent in July, from 7.2 per cent in June. This chimes with the news yesterday that pay growth has accelerated to reach its highest level on record and is likely to further upward pressure on prices.

The Foundation notes that continued high food inflation (14.9 per cent) means that the average food bill has now increased by £960 since 2019-20, overtaking the increase in the average energy bill (£910) for the first time. Poorer households are disproportionately affected by these drivers of the cost of living crisis as they spend more of their budgets on these essential items.

Despite recent falls, the UK still has the highest inflation rate in the G7, and the second highest among OECD advanced countries that we currently have comparable data for, with only Iceland having higher inflation in July.

Looking at longer-term price pressures, the Foundation notes that the UK has experienced the third largest rise in price levels since July 2019 among OECD advanced economies at 21.1 per cent, behind only Iceland and Austria.

James Smith, Research Director at the Resolution Foundation, said:

“Inflation has fallen rapidly over the past six months, but the UK still has the highest rate in the G7 and the Bank faces a daunting task in further taming price pressures.

“Accelerating pay growth will make even the Prime Minister’s promise to halve inflation hard to meet, let alone the Bank’s mandate of reducing it to 2 per cent.

“The UK has experienced the third largest price pressures of any advanced economy since the pandemic. This highlights just how painful this cost of living crisis continues to be, and how unwise it would be to meddle with policies like benefits uprating that are designed to protect families from price pressures like this that are beyond their control.”