Sun, 14 April 2024

Newsletter sign-up

Subscribe now
The House Live All
Mobile UK warns that the government’s ambitions for widespread adoption of 5G could be at risk Partner content
Mission possible: Delivering tomorrow’s homes today Partner content
Press releases

Economists Warn Inflation Target May Be Missed Despite Recent Fall

While CPI fell from 7.9 per cent to 6.8 per cent, core inflation has remained stagnant at 6.8 per cent. (Alamy)

4 min read

A high rate of core inflation has triggered warnings from economists of more interest rate hikes and of the government missing its inflation target, despite a recent overall consumer price index (CPI) inflation fall.

Core inflation is often seen as a more useful way to measure inflation as it does not consider items which more volatile prices like energy bills or food in its measurements. 

The latest figures from the Office for National Statistics (ONS) have shown CPI inflation rose by 6.8 per cent in the 12 months to July 2023, down from 7.9 per cent in June.

In contrast, core CPI inflation rose by 6.9 per cent in the 12 months to July 2023, unchanged from June - and elsewhere, CPI inflation for services annual rate rose from 7.2 per cent to 7.4 per cent.

Responding to the latest inflation figures, Chancellor Jeremy Hunt on Wednesday said the drop in inflation was a reflection of the government's policies. 

“The decisive action we’ve taken to tackle inflation is working, and the rate now stands at its lowest level since February last year," said Hunt.

“But while price rises are slowing, we’re not at the finish line.

"We must stick to our plan to halve inflation this year and get it back to the 2 per cent target as soon as possible.”

However, economists have warned persistent high core inflation could jeopardise the government's pledge to half inflation from the 10.1 per cent it was at the beginning of the year, and also trigger more interest rate rises. 

Research director Jamie Smith at the Resolution Foundation said while the drop in overall CPI inflation was "good news", core inflation represented a "stickier" problem. 

"If you strip out the things that we knew were happening in terms of energy prices falling and food price inflation, looking at core inflation the situation you get is a little bit stickier, more persistent inflation, with less good news," Smith told PoliticsHome.

Smith said that it could signal future interest rate rises, and also pose a risk to the government's inflation reduction targets.

"If you look underneath the bonnet here on inflation and you combine that with what's going on with the Bank of England, that suggests we might get a bit more by way of rate rises," said Smith.

"We'll see that in the coming months, but also there's a risk in terms of the Prime Minister being actually be able to hit that target of halving inflation."

His remarks come after fourteen consecutive months of interest rate hikes by the Bank of England after inflation hit a 41 year high in October 2022 at 11.1 per cent. 

George Dibb, head of the Centre for Economic Justice at IPPR, told PoliticsHome core inflation stagnating has shown "underlying inflationary pressures are remaining high", and that overall inflation has been "pulled down by the more volatile elements" like energy bills. 

"The fact that this morning's results show that core inflation is not changing, and that it's staying the same, will be quite worrying to the Bank of England," said Gibb. 

"It could be worse, it could be going up - but it's not going up or down."

And Heidi Karjalainen, research economist at the Institute for Fiscal Studies (IFS), also said "core inflation is still very high" and risks more painful interest rate hikes in the coming months putting more pressure on households already struggling with the cost of living crisis. 

"If this kind of high period of high core inflation continues, then the Bank of England will meet, will feel a lot more pressure to actually continue increasing interest rates - both potentially increasing them at a faster rate, or keeping them higher for for longer."

Responding to today's inflation figures, Labour's shadow chancellor Rachel Reeves said it demonstrated "Tory economic failure". 

“Inflation in Britain remains high and higher than many other major economies," said Reeves.

“After 13 years of economic chaos and incompetence under the Conservatives, working people are worse off - with higher energy bills and prices in the shops.

“Labour’s plan to build a strong economy will make working people better off by boosting growth, improving living standards and cutting household bills.”  

PoliticsHome Newsletters

PoliticsHome provides the most comprehensive coverage of UK politics anywhere on the web, offering high quality original reporting and analysis: Subscribe

Read the most recent article written by Nadine Batchelor-Hunt - Labour's Tax Crackdown Could Be Dampened By "Bigger Public Finance Challenge", Economists Warn


Engineering a Better World

The Engineering a Better World podcast series from The House magazine and the IET is back for series two! New host Jonn Elledge discusses with parliamentarians and industry experts how technology and engineering can provide policy solutions to our changing world.

NEW SERIES - Listen now