The Office for National Statistics reported this week that consumer price inflation fell to 2.1 per cent in June, the lowest reading since early 2021. For an economy that spent the better part of two years with inflation running at double digits, this is genuinely good news. The Bank of England's long campaign to bring price growth under control has, by this measure, largely succeeded.
The caveats begin almost immediately, however. Inflation at 2.1 per cent means prices are still rising, just more slowly. The cumulative effect of three years of elevated inflation is that the average household is paying substantially more for almost everything than it was in 2021. Energy, food, housing costs, insurance — all are higher. The fall in the inflation rate does not undo any of that.
Energy and Food
Energy costs remain the most significant pressure point for lower-income households. The energy price cap has fallen from its peak but remains above pre-crisis levels. The government support schemes that helped households through the worst of the crisis have ended. Charities working with fuel-poor households report that the problem has not gone away; it has simply become less visible.
Food prices have stabilised. Supermarket data suggests that the average weekly grocery bill is still roughly 18 per cent higher than three years ago. The shift towards own-brand products that began during the crisis has not reversed. Whether this represents a permanent change in shopping behaviour or a temporary adjustment remains to be seen.
Wages and the Bank of England
Average earnings growth has outpaced inflation for several consecutive months, which means real wages are rising in aggregate. The Bank of England is expected to cut interest rates at its next meeting, which would reduce borrowing costs for variable-rate mortgage holders and, eventually, for consumers more broadly.
"The direction of travel is positive. The pace is slower than many households would like, and the starting point — after three years of elevated prices — is significantly worse than it was." — Economist, Institute for Fiscal Studies
The distribution of gains matters as much as the aggregate. Higher earners have seen stronger real wage growth. Those in lower-paid, less secure employment have not fared as well. The Resolution Foundation's analysis suggests that the bottom third of the income distribution is still, in real terms, worse off than before the cost-of-living crisis began.
What Comes Next
A rate cut would help. Lower borrowing costs would reduce the burden on mortgage holders and, over time, on consumer credit. But the structural issues — housing costs, childcare, the state of public services — are not addressed by monetary policy. They require political decisions that are harder and slower to make than adjusting interest rates.
For now, the inflation figure is a genuine piece of good news. It is just not the whole story.