Inflation in the UK has fallen to its lowest figure for months, to 6.8% in July – but that decrease comes with a new set of problems, according to experts.
Here’s why the risk of recession is now higher than before.
What has happened to the inflation rate?
Inflation is the measure of how much prices for goods and services change over the last 12 months. It’s been far too high in the UK recently, triggering a cost of living crisis.
So, this decrease should signal that things are looking up for households across the country. It means the rate has gone to its lowest level since February 2022, when Russia invaded Ukraine.
As the Office for National Statistics (ONS) revealed on Wednesday, inflation fell from 7.9% in June. That means prices are still rising – otherwise inflation would be at a negative rate – but they are increasing more slowly than before.
The fall stems from energy regulator Ofgem’s decision to change the energy price cap in July, which made electricity and gas cheaper. This had a positive knock-on effect for prices of everyday basics like milk, bread, cheese and petrol and diesel.
However, hotels and air travel remain more costly than usual, which means the overall inflation rate is still high.
Core inflation, which does not include sudden changes, is still at 6.9% – and food price rises remained seven times higher than a year ago, at 14.9%.
Still, chancellor Jeremy Hunt said this was a sign that the “decisive action” the government has taken is “working” although “we’re not at the finish line”.
How could this increase the risk of recession?
A recession is defined as two consecutive quarters (six months) of negative growth.
So far, the UK has narrowly dodged this technical definition, having had periods of 0 growth rather than negative.
But, as IPPR’s Centre for Economic Justice warned, falling inflation might mean a greater recession risk.
IPPR’s Dr George Dibb said: “It’s good news that headline inflation is lower, especially with energy bills coming down, but there is a very real risk that a recession may soon overtake price rises as the main economic concern.
“Other countries have brought inflation under control quicker than in the UK, with more support for households and workers avoiding unnecessary pain.”
He pointed out that interest rate hikes can take up to 18 months to hit the entire economy – and any further interest rates raises may “kill the recovery” efforts.
The Bank of England has increased interest rates for 14 times in a row now – it currently stands at 5.25%. The Bank has also indicated that the rate will stay high for two years.
“There are already signs of falling consumer confidence and rising unemployment,” Dr Dibb warned, pointing out that prices still are not falling – and so low-income households will still be struggling.
He added: “By supporting households and businesses with energy costs, making businesses play their part, and supporting renters, countries like Spain have shown that inflation can be brought down without the economy going into tailspin.”
What will happen next?
The Bank of England has forecast that inflation will decrease to 5% by the end of this year – which is still a long way off the Bank’s 2% target.
Liz Edwards, editor in chief at personal finance comparison site, finder.com, told HuffPost UK: “It’s a relief to see that price increases are finally beginning to slow and, if this continues, we can expect to see consumers feeling less squeezed.
“It’s worth remembering that many prices are still rising – just not as quickly as they were.”
Yet, Edwards added that the wage growth figures from Tuesday complicate things.
ONS figures released on Tuesday showed pay grew by 7.8% in the three months to June.
She explained: “This surge in wages could provoke the Bank of England to continue its run of base rate hikes at the next MPC meeting in September.
“Higher rates could increase household costs in other areas, such as mortgage and rental payments, which will continue to put a strain on consumers’ purse strings despite falling inflation.”