UK CPI has fallen further than expected in June, with the Office for National Statistics registering a reading of 7.9% compared to economist predictions of 8.2%, but the UK remains at odds with other developed nations.

Core inflation also came in below expectations, with a reading of 6.9% compared with predictions of 7.1%, reports Investment Week.

While both measures have offered a positive surprise, investors, economists and the chancellor are veering on the side of caution.

Chancellor Jeremy Hunt welcomed the lowest inflation reading since March 2022, but asserted HM Treasury was not "complacent" and acknowledged the "huge worry" high prices pose for businesses and families.

He added: "The best and only way we can ease this pressure and get our economy growing again is by sticking to the plan to halve inflation this year."

Marcus Brookes, chief investment officer at Quilter Investors, noted that despite the "glimmer of light" offered by June's inflation figures, the UK remains a "drastic outlier" compared to other developed economies in the fight against inflation.

"Frustratingly, while also beating expectations core inflation is remaining persistently stubborn and refusing to budge significantly," he explained. "It may be that finally the well-known lags in the effect of interest rate rises are beginning to have an effect, but it still remains very sticky so way too early to begin celebrating. Demand has withstood both inflation and the rise in rates, but cracks are appearing, and as more mortgage holders get exposed to the current rates, the economy is likely to be hit as a result."

Interest rates

While the impact of interest rates is seemingly translating through to the economy, few are anticipating a shift in tone from the Bank of England.

Hussain Mehdi, macro investment strategist at HSBC Asset Management, argued that despite the "tentative evidence" inflationary pressures may be starting to ease, the central bank remains under "significant pressure" to continue with its tightening measures while economic activity remains resilient and the labour market runs hot.

"We would not push back against market pricing of a 6% terminal Bank Rate and think rate cuts are unlikely until late 2024," Mehdi said.

Chief investment officer at Premier Miton Investors Neil Birrell agreed that while inflation delivered a positive surprise, the BoE cannot rest on its laurels.

 

This article was first published by sister website Investment Week.

 

He said: "Although we should expect it to track down further and it may be at its lowest level for a year, [inflation] is still high in absolute terms and the Bank of England needs to be vigilant and act accordingly until there can be a level of certainty that inflation is back under control."

But, Chris Beauchamp, chief market analyst at IG Group, reflected on the positive news: "There will be sighs of relief all round at the Bank of England this morning, though one slower CPI print is not enough to cause a change in policy. But Andrew Bailey and his team will hope that it is the start of a trend."