Does the latest ONS data suggest that the economic outlook is about to improve? Our popular blogger, Steve Herbert considers the evidence
Good economic news has been in short supply in recent weeks, yet the latest slice of inflation data from the Office for National Statistics (ONS) provided at least some hope that things may be set to improve soon.
For the ONS’s July release (relating to the June 2023 inflation data) showed a not insignificant drop in the headline inflation figure – the Consumer Prices Index (CPI) – from 8.7% in May to 7.9% in June. This is clearly good news.
More good news
Yet the really good news was perhaps overlooked by the national media. Tucked away in the ONS commentary was this simple but important sentence:
“There were no large offsetting upward contributions to the change in the rate.”
In lay terms, this suggests that all the key inflation indicators are finally starting to move in the right direction, including the important “core” inflation figure. Core inflation effectively strips out the most volatile inflationary elements such as energy and food costs, and this figure went down (a little) from 7.1% to 6.9% in June. This is important, as the Bank of England (BoE) was deeply concerned that core inflation appeared to be increasing in the previously published data.
One step at a time
However, no one should get carried away with these positive developments.
Inflation was always expected to drop dramatically throughout the course of 2023 as the energy and associated price spikes from 2022 eventually dropped out of the annual figures. And the UK’s inflation numbers are still significantly higher than other advanced economies.
It should also be noted that, at 7.9%, CPI is still around four times the BoE target rate of 2%, and that prices (particularly food prices) continue to rise, even if the rate of those price increases has declined a little (this is still inflation and not deflation). Yet things are beginning to improve, with the headline rate of UK inflation now 3.2% below its recent peak of October 2022 (as shown in the ONS chart below):
Interest rates (and borrowing costs)
Another potential positive is that the lower inflation rate (and particularly that reducing core inflation figure) might result in a change of direction from the Bank of England in their base rate decision next month.
The BoE has been steadily – and repeatedly – increasing the national base rate of interest in an attempt to combat stubbornly high inflation. Indeed, the base rate has increased thirteen times in a row, from a 300-year historic low of 0.1% to 5% in just 18 months.
Whilst these steep increases have been helpful* to savers, they are potentially disastrous to households with large mortgages and businesses looking to refinance. The BoE’s aim was to cool the economy – possibly even forcing the UK into a recession – to tame the ongoing inflationary risk.
Yet the latest inflation data might force a rethink by the BoE’s Monetary Policy Committee (MPC). The MPC were not unanimous in last month’s rate increase decision, and the latest inflation data has already led some financial experts to downgrade their expectation of a further 0.5% increase in August to 0.25%. Other experts are already arguing that any further increase may be unnecessary. For instance, former MPC member Danny Blanchflower said on Radio 4 last month:
“Inflation is set to plummet, and the reason it’s going to plummet is that there have been thirteen rate increases, and they take a while to have an effect… what you are going to see 18 months down the road is deflation… believe me, that’s what’s coming…they should not have raised rates.”
Such a warning should be taken seriously.
Mr Blanchflower is voicing a valid concern that the measures to combat inflation may have now gone too far – possibly oversteering the economy from high and persistent inflation in 2023 to possible deflation in 2024 or 2025. Deflation poses a major economic challenge in itself, but that is a topic for another post.
But for the moment employers and employees will probably rightly welcome the potential good news that the latest inflationary figures suggest for the nation.
Continue to support employees
That said, retail costs are still going up for all, and many working people are facing a very significant increase in their mortgage costs as their previous fixed-term deals end this year. And those employees in rental properties may face similar increases when their landlords refinance their buy-to-let mortgages and potentially pass on those costs to their tenants.
So, despite the implied good news of reducing inflation numbers, 2023 still represents a horrible double-whammy of financial pressures for millions of workers, and in turn, this poses a problem for employers too. The reality is that a financially-stressed employee is likely to be less engaged and productive than those without such concerns.
It follows that employers should continue to actively support the financial wellbeing of their workforce. Simple and cost-efficient offerings such as employee discount schemes, signposting to state support, and financial education can all make a really big difference when every penny counts.
Steve Herbert is Wellbeing & Benefits Director at Partners&
*But only when these increases have been fully passed on by banks and building societies, which has not always been the case in recent months (see this news story from the BBC website)