Weekly News Review - 18th August 2023

UK inflation slows to 6.8% in July as energy prices fall

UK inflation fell to 6.8% last month, down from 7.9% in June, helped by the fall in energy prices. This represents the smallest increase in the cost of living since February 2022, although it is not expected to be enough to prevent another interest rate rise from the Bank of England. While the consumer price index (CPI) has fallen, other measures of inflation have remained stable or increased and critics have highlighted that prices are still increasing just not as fast as before.

The energy price cap, which sets a limit on the unit prices paid by households, decreased in July to £2,084 a year for an average household. This means that energy prices were at a similar level to last summer when the price cap was £1,971. Whereas, energy bills were higher in June 2023 when the government’s Energy Price Guarantee capped them at an average of £2,500 a year, 27% higher than` in June 2022.

Wages rose by around 8% year on year in the second quarter of 2023 and are now increasing at a faster rate than prices for the first time since autumn 2021. This has increased the pressure on the Bank of England to proceed with a 15th consecutive rate rise at their next meeting in September. Interest rates have increased from 0.1% in December 2021 to the current rate of 5.25% and are expected to increase further to 5.5% next month.

Core inflation, which measures the price of energy, food, alcohol and tobacco, remained steady in July at 6.9%. This is higher than other major economies such as France, Germany and the US and is another factor which influences the Bank of England’s decision on interest rates. Services inflation, which covers the hospitality sector, increased in July to 7.4% driven by an increase in hotel prices.

Matthew Corder, the ONS deputy director of prices, said: “Inflation slowed markedly for the second consecutive month, driven by falls in the price of gas and electricity as the reduction in the energy price cap came into effect. Although remaining high, food price inflation has also eased again, particularly for milk, bread and cereal.”

Danni Hewson, head of financial analysis at AJ Bell, said: “Inflation is still significantly above that 2% target and even if it is cooling off faster than a sunburnt Brit diving into a hotel pool, prices are not falling, they’re just not rising as fast as they have been. Wage increases and price pressures have forced up service costs and that’s weaving its own nasty spell on core inflation.”

Rural areas being hit hardest at pumps as fuel prices rise again

UK petrol prices are at their highest for six months as supermarkets are accused of overcharging customers in rural areas. The recent rise in global oil prices has filtered through to forecourts with the cost of petrol hitting 149.1p a litre on Sunday, the highest level since February. Diesel prices have also increased in recent weeks and are now at 150.6p a litre.

Global oil prices have been rising since the Organisation of Petroleum Exporting Countries (OPEC+) agreed to cut production by 1m barrels per day from July. Before the reduction in supply, Brent crude was trading at $74 a barrel but has steadily risen to reach $89 a barrel last week, the highest level since November 2022.

However, the AA has noted that the rise in petrol prices has not been applied uniformly across the country with rural areas facing higher prices. Their analysis has found that motorists in rural areas are paying, on average, between 10p and 15p per litre more for petrol at supermarket filling stations. For an average family car with a 60 litre tank this translates to an additional cost of at least £6 for a full tank.

Luke Bosdet, the AA’s spokesperson on pump prices, said: “Despite the government and CMA taking the supermarkets to task for over-charging drivers for fuel, this past weekend still showed major differences in supermarket pump prices around the country. Bad habits are proving hard to shake off among the UK’s fuel retailers and that is not solely the fault of the supermarkets.”

“Over the decades, a supermarket policy of shaving a penny or two off what other local fuel stations charge has stunted competition within those higher-priced communities; oil company-branded forecourts could have undercut those expensive supermarkets but they were happy to play along.”