- CPI inflation rises from 2% to 2.2%
- Energy prices largely to blame, as they didn’t fall as fast as last year
- Core inflation and services inflation both fell
- Many risks remain that could spike inflation further
Laura Suter, director of personal finance at AJ Bell, comments on the latest UK inflation rate:
“An expected jump in inflation takes CPI to 2.2% for July and marks the first rise in inflation this year. Energy prices are largely to blame, having not dropped to the same extent that they did last year. The price of energy actually fell in the month, but due to the way inflation is calculated energy prices didn’t fall by as much as they did in July last year, which translated to an increase in the figures.
“It’s a common story across a number of areas, where prices fell in the month, but were higher than a year ago – having the effect of pushing up headline inflation. We saw a similar story in petrol and diesel prices and in second-hand cars.
“Food prices didn’t drop for the first time in 16 months, but they stood still at 1.5%, a huge drop from the 14.9% rise we saw this time last year. As usual, there were some items that rose more than others. For example, if you had individual cakes, milk and large chocolate bars in your basket you’ll have seen a bigger bill at the checkout than last month.
“But that headline CPI figure of 2.2% doesn’t tell the whole story – core inflation actually fell to its lowest level since September 2021. The CPI measure once you strip out more volatile elements like energy, food, alcohol and tobacco, dropped to 3.3% in July from 3.5% in June. On top of that, services inflation fell from 5.7% to 5.2%. This measure is closely watched by the Bank of England as it has been particularly sticky during the recent drops to headline inflation.
“Anyone who was hoping that the inflation genie is back in the bottle will be disappointed. It’s not guaranteed to be smooth sailing from here – the list of things that could derail inflation are long and varied. They range from wet weather damaging crops, to extreme heat also damaging crops and pushing up food prices, to geopolitical tensions impacting supply chains, energy prices rising or employers dishing out bigger pay rises. And that’s before we get to the changes the new government decides to make in its first Budget at the end of October, which could have a wide-ranging impact on the economy and therefore inflation.
“Of course, the real impact of this is on the next Bank of England interest rate decision, where expectations of another rate cut following hot on the heels of August’s could now be dampened. While there are lots more things to consider before the MPC meets, this week of a flurry of data about the state of the UK has so far not done much to raise hopes of another imminent rate cut.”
Inflation and commuters
“July is a key month for commuters, although many may not know it. The annual increase in many rail fares is linked to the RPI measure of inflation and usually based on the July reading of that figure. This year it clocks in at 3.6%, meaning that could be the increase we all see on our season tickets next year.
“However, in recent years the government has deviated from the usual practice of raising rail fares by this amount every January by delaying the price increase as well as reducing it from the headline RPI rate during periods where it was sky high. Now inflation is back to more normal levels it may decide to return to the standard playbook of an RPI increase in January. The decision on this may be made today, or announced at the Budget in October, or be delayed until closer to Christmas – but commuters will want certainty over how much they are paying as soon as possible.”
