Inflation expected to slow down again after energy price fall

Official figures are set to reveal another slowdown in inflation on Wednesday after energy prices decreased in July.

It comes after another record increase in wages placed further pressure on the Bank of England to grapple with inflation and continue with recent increases to interest rates.

The consensus among economists is that the Office for National Statistics (ONS) will reveal Consumer Prices Index (CPI) inflation of 6.7% for July, down from 7.9% in the previous month.

The fall will be partly down to a reduction in energy prices, after volatility sparked by the Russian invasion of Ukraine eased back.

From the start of July, the average price for each unit of electricity that someone uses was slashed to 30p per unit, while gas prices fell to 8p per unit, meaning the average annual energy bill for a household dropped to £2,074 from the capped rate of £2,500.

Food and core goods inflation have also both slowed, according to latest industry survey data.

Rishi Sunak said the Government will “stick to the plan” irrespective of the latest inflation reading, as he seeks to meet his pledge to halve the inflation rate this year.

He said: “We are making progress, the last set of numbers we had showed that inflation was falling faster than people expected.

“The plan is working. I think there is light at the end of the tunnel.

“If we get through this, people will really start to see the benefit in their bank accounts, in their pockets, as inflation starts to fall.”

On Tuesday, the ONS revealed that regular pay growth, which excludes bonuses, reached a record 7.8% compared with a year earlier, for the quarter to June.

However, once inflation is taken into account, real wages were down by 0.6%.

Separate data on Tuesday from analysts at Kantar also recorded that the price of groceries slowed for the fifth consecutive month in the four weeks to August 6, but at 12.7% higher year-on-year it was significantly ahead of wage inflation.

Economists have said Tuesday’s wage inflation data will put further pressure on the Bank of England to ensure it can bring inflation under control, as it attempts to drag it back towards its 2% target rate.

The central bank’s Monetary Policy Committee has already issued 14 interest rate hikes in a row to take the current base rate to a 15-year high of 5.25%.

The Bank of England is “nailed on” to increase interest rates in September, even if the ONS reports another sharp slowdown in inflation on Wednesday, according to James Smith, developed markets economist at ING.

“Overall, despite the apparent weakening in hiring and ongoing improvement in worker supply, the Bank will remain focused on wages,” he said.

“When it comes to Wednesday’s CPI figures, we think there’s some scope for a positive surprise on services inflation, but ultimately a September rate hike still looks nailed on.”