Has Inflation Fallen?

Last week, analysis from the ONS saw headline inflation fall to 6.8% in July, down 1.1% from June. Despite the government deeming this to be an overwhelming success towards their target of halving inflation, it’s not all good news. Unfortunately, food inflation is still at 14.9%, which is severely impacting households and their struggles in the ongoing cost of living crisis. Not only this, but further rises from the Bank of England might still be on the cards.

The fall in inflation was largely down to the drop in energy prices, which were grossly elevated last year. However, core inflation has stayed the same at 6.9%. This measure of inflation strips out volatile costs, such as energy and food prices and is seen by some as a better measure. Service sector inflation, on the other hand, rose 0.2 points to 7.4%. Coupled with strong wage growth that has already been seen, this could point to another Bank of England rate hike.

As core inflation has not moved, the UK is struggling to get its stubbornly high levels of inflation under control. European Union annual inflation was only 6.1% in July, down by 0.3% the previous month. Last year, the figure was much higher at 9.8%. Belgium currently has the lowest rate at 1.7%, followed by Luxembourg and Spain. The biggest decreases for the bloc also came from energy prices. American inflation is at 3.18%, down from 8.52% last year.

For the 3.1 million low income families in the UK, these figures aren’t good news. People have already been cutting back on essentials, basic toiletries and adequate clothing. Of the 5.6 million low income households, Stirling Bank has observed that more than £14 billion is owed in unsecured lending, such as credit cards and overdrafts. As borrowing has been getting more expensive with every Bank of England interest rate rise, these households are being affected even more.

Wages have failed to keep up with rising prices, but some figures revealed that wages have risen by 7.8% between April and June on an annual basis. Despite making a positive headline, the real terms wage rises make for gloomier reading. In actuality, adjusting for inflation, wage increases in real terms were only 0.5% for total pay and 0.1% for regular pay. The dangers of rising wages creates an inflationary spiral that keeps pushing up prices, but this is just one internal factor to deal with outside of the various other external factors at play.

The ONS statistics shows that real average weekly earnings are currently at £469. May 2019 figures adjusted for inflation also present this same figure. Likewise, this is the same as December 2010. Even worse is that this £469 level of weekly earnings was the same in March 2006. As the UK is trying to push economic growth, productivity levels need to increase. One of the difficulties in measurements currently used is that other countries measure productivity differently.

Levels of inflation may continue to be stubborn, as rent, air travel and hotels remain inflated. Haulage is one area where costs have to be passed onto consumers as business costs rising elsewhere cannot be absorbed by logistics companies. Salaries, finance, maintenance, insurance and fuel only ever increase, especially as companies cut costs elsewhere and try to be more competitive.

Air travel has increased costs by 29.8% in the year to July, elevating by 3.1% from the previous month. Restaurants and hotels, on the other hand, increased by 9.6% in July, up by 0.1%. These figures all point to an inflationary level that will be hard to beat down to the target of 2%.

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