17^th July 2024

Main points:

• Today’s ONS figures indicate that annual CPI inflation remained at the Bank of England’s target of 2 per cent in June, after hitting the target for the first time since July 2021. This figure reflects upward contributions, such as those from restaurants and hotels, being offset by downward contributions from several item categories, particularly clothing and footwear.

• However, the downward trend in inflation is likely to be over as the big monthly drop-outs from 2023 have passed. We expect inflation to rise throughout the second half of 2024 due to base effects from last year, before falling back towards target in early 2025. Moving forward, it would be important to keep an eye on month-on-month inflation figures (‘new’ inflation) to determine to what extent we inflation will rebound in the coming months.

• Although headline inflation remaining at the target level is good news, underlying inflationary pressures remain high. Today’s data show that core inflation remains elevated at 3.5 per cent, as does services inflation at 5.7 per cent. Given last month’s strong wage growth data, services inflation may remain elevated in the near-term, posing an upward pressure to headline inflation.

• However, it is encouraging that NIESR’s trimmed-mean inflation measure (which excludes 5 per cent of the highest and lowest price changes to eliminate volatility) has fallen to 1.7 per cent, remaining around the lowest levels in nearly three years. This figure reflects large price increases in some sectors, driving the headline rate upwards.

• Considering that core and service inflation remain elevated, and the fact that inflation is expected to rise throughout the rest of the year due to base effects, the BoE may exercise some caution on their decision.

• For a breakdown of what inflation is and how it is calculated, read our blog post here.

Monica George Michail, NIESR Associate Economist: “While CPI inflation remaining unchanged at 2 per cent is good news, core inflation remains elevated at 3.5 per cent, as does services inflation at 5.7 per cent, possibly prompting the Bank of England to remain cautious with regards to interest rate cuts. We expect inflation to rise throughout the rest of the year due to base effects, before falling back towards target in early 2025”.

For a copy of our full analysis, please access this month’s CPI tracker from our website.