UK interest rates and inflation picture grim: Ian McConnell

What is more, the inflation situation in the UK, which has its own very peculiar problems arising in no small part from Brexit, continues to look grim indeed compared with that in other major economies.

Annual consumer prices inflation in the US was just 3% in June. In the eurozone, it was 5.5% last month.

In the UK, the drop in annual UK CPI inflation, from 8.7% in May to 7.9% in June, was sharper than had been anticipated by economists polled by Reuters, who had foreseen a fall to 8.2%.

Base-year effects mean that UK inflation is likely to fall significantly further, although we must not lose sight of the cumulative effect if it does.

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The Conservatives are likely to paint any such further fall in inflation as something they have brought about, given the degree to which they have banged on about such a decline being a major policy priority for them.

Prime Minister Rishi Sunak pledged in January that the Conservative Government would “halve inflation” this year, in his “building a better future” speech.

This speech came after official figures had shown annual UK CPI inflation hit a 41-year high of 11.1% in October, before dipping to 10.7% in November, still more than five times the 2% target set for the Bank of England by the Treasury.

Figures after Mr Sunak’s speech showed annual UK CPI inflation was 10.5% in December last year.

So we should be clear that there would be nothing to celebrate even if inflation were to be halved from its previous 10%-plus levels. After all, such a halving would leave inflation at more than two-and-a-half times the target.

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As he banged the drum about the first of “five foundations, on which to build a better future for our children and grandchildren” in January, we had this from Mr Sunak: “We will halve inflation this year to ease the cost of living and give people financial security.”

A halving of inflation would do no such thing. And it would not be down to the Tories either.

Furthermore, comparison with the international data shows that the Tories have been anything but successful on the inflation front, in terms of the impact of their policies. Crucially, their hard Brexit has fuelled the UK’s inflation woe, as has their failure on household energy prices in recent times as consumers have paid the price for woeful policymaking by the Tories.

Brexit has propelled UK food prices higher.

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The Centre for Economic Performance (CEP) at the London School of Economics and Political Science updated its analysis of the impact of Brexit on food prices in May.

The May paper from Jan David Bakker, Nikhil Datta, Richard Davies, and Josh De Lyon observed: “The cost of Brexit to each household now stands at £250 when only considering the impacts on food since December 2019. This aggregates up to £6.95 billion overall for UK households.”

Of course, the Tories have been at pains to pretend that the grim effects of their hard Brexit do not exist. They have seemed determined to point the finger elsewhere, talking a lot about Russia’s invasion of Ukraine.

This political dimension makes independent research into the actual effects of Brexit all the more important.

The CEP’s May paper declared: “The observed price increases of products more exposed to Brexit are not correlated with macro events which could be associated with inflationary pressures such as Covid lockdowns, or the Russian invasion of Ukraine. Furthermore, the fact that the results are driven entirely by products with high NTBs (non-tariff barriers) imported from the EU offers strong evidence that Brexit is the driving force behind these effects.”

The Tory hard Brexit has also fuelled the UK’s skills and labour shortage crisis. It has also turbo-charged wage inflation. And pay inflation seems to be causing angst for some members of the Bank of England’s Monetary Policy Committee.

UK base rates have already surged to 5%, from a record low of 0.1% in December 2021.

This is causing major pain for millions of households and many businesses.

And, while last week’s inflation data saw economists and financial markets rein in expectations of the extent of further rises in base rates by the Bank of England, the benchmark cost of borrowing is still expected to go higher.

There has understandably been great debate over the Bank of England’s monetary policy.

Some fear, and it is easy to see why they do so, that the surge in interest rates that has been seen and the further increase that is anticipated will bear down unnecessarily on growth at a time when expansion is crucial.

Against this backdrop, the fall in inflation revealed in last week’s figures is cold comfort.

The fact that there appeared to be some muted relief over the June inflation number for the UK shows just how bad the situation has been.

The suggestion of a 7.9% annual inflation rate a couple of years ago would surely have prompted a reaction of horror.

It is crucial to recognise that the cumulative effect of the UK’s inflation woe is colossal.

We must also remember that the UK ranks very poorly indeed on the inflation front in an international context.

And a halving of inflation this year, we must also recognise, would mean the situation would still be dire.

It would therefore be extremely irritating for the Tories to be trumpeting success over such a halving, not just because they fuelled inflation in the first place but also because the expected sharp fall if it transpires will be down to base-year effects and not anything they have done.

All the while, it will be households and businesses that continue to pay the price.