“Today’s data strengthens the case for the Bank of England’s cautious approach, with underlying inflationary pressures remaining relatively muted in an environment of weak domestic demand. Although the impacts from the initial energy shock have so far been relatively limited, if energy prices remain high for longer, second-round effects risk feeding through into wages and more broadly across the economy.
“Inflation fell to 2.6% in June, driven by a decline in transport and food prices. Services inflation also eased slightly. We expect June to mark the trough, with inflation set to edge up from July as higher household energy bills take effect coinciding with the rebound in fuel prices.
“The new government’s stated objective to help ease cost of living pressures, including the temporary reduction in VAT on energy bills, could put some downward pressure on headline inflation over the coming year. Nonetheless, many of the costs facing households stem from longer-term structural challenges, particularly in energy, housing and transport. Addressing these issues will require a combination of reform and higher public investment. Any new reforms will take time to benefit households, while higher public investment may prove challenging given the state of the public finances.”
