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UK inflation fell to a 15-month low of 7.9 per cent in June, a bigger drop than anticipated that made it more likely that the Bank of England will raise interest rates by only a quarter-point next month.
Sterling fell and property stocks rallied on the news, which came as a boost to Prime Minister Rishi Sunak.
Annual inflation was down from 8.7 per cent in May, the Office for National Statistics said on Wednesday. It was lower than the 8.2 per cent predicted by economists polled by Reuters, ending a four-month run during which inflation outstripped forecasts.
Aided by a drop in the cost of motor fuels, the headline figure was the lowest since March 2022, while underlying “core” inflation fell slightly to 6.9 per cent.
“With significant inflation falls now coming through, the UK is less of an outlier in the battle to tame inflation,” said James Smith, research director at the Resolution Foundation think-tank.
Sterling fell to its lowest level in a week, trading down 1.1 per cent against the dollar at $1.2897, as traders reined in their expectations of future interest rate rises.
Paul Dales, economist at Capital Economics, said that, while the fall in inflation was unlikely to deter the BoE from increasing rates at its next meeting, “it may tilt the balance towards a 25 basis points hike rather than 50 basis points”.
Markets now give a 60 per cent probability of a quarter-point rise to 5.25 per cent at the August 3 meeting. Before Wednesday’s news, they had been pricing in a better than even chance that the bank would increase rates by a half-percentage point to bring inflation back to its 2 per cent target.
Traders expect BoE benchmark interest rates to peak just below 6 per cent early next year. Before the inflation figures came out, they had anticipated a peak of just above 6 per cent.
Shares in UK property groups and housebuilders surged as investors concluded that mortgage rates would now also rise less than they previously expected.
Myron Jobson at Interactive Investor, an online investment platform, said the reset in expectations “could spell the end of the chaos which has gripped the mortgage market in recent months”.
Persimmon, Barratt and Taylor Wimpey rose 8.3 per cent, 7 per cent and 6.8 per cent, respectively, helping London’s FTSE 100 rise 1.8 per cent.
Land Securities, one of the UK’s largest landlords, and real estate group Segro were also among the FTSE’s biggest winners on Wednesday.
The inflation figures were welcome news for Sunak, who has sought to put economic competence at the heart of his electoral appeal but is far behind in the polls and faces three tough by-election tests on Thursday.
Downing Street said it was “encouraging to see headline and core inflation rates falling” but acknowledged that businesses and families were still suffering from high prices.
Asked whether Sunak was confident that inflation would halve by the end of the year to 5.4 per cent — one of five pre-election pledges the PM has made — his spokesman said: “We have set out that commitment. We are not going to forecast.”
But Rachel Reeves, shadow chancellor, maintained that “persistently high” inflation under Sunak’s government was “becoming a hallmark of Tory economic failure”.
One of the most closely watched metrics was the fall to 6.9 per cent in core inflation, which strips out volatile food, energy, alcohol and tobacco prices. It had reached a 31-year high of 7.1 per cent in the previous month, a level at which analysts had expected it to remain.
Services inflation also eased to 7.2 per cent in June from 7.4 per cent in May.
Despite remaining at historically high levels, food inflation also fell to 17.3 per cent in June, from 18.3 per cent in the previous month.
But overall UK inflation remains higher than in other G7 countries, with economists blaming a combination of surging energy costs and labour shortages.
In June, inflation slowed to a 27-month low of 3 per cent in the US and to a 17-month low of 5.5 per cent in the eurozone.
Dales at Capital Economics said: “The UK will probably still have higher rates of inflation than elsewhere for a while yet, but at least the UK is now following the global trend.”
Additional reporting by Mary McDougall
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