Inflation: Is it all ‘good news’, what does it really mean – and is it going in the right direction?

We should cherish good news while we have it – but the future is not all roses

Not wanting to be churlish, the latest news on inflation is pretty good.

The latest annual rate has come in below expectations. It’s a chunky enough drop – from 8.7 per cent to 7.9 per cent – the underlying or core rate is similarly down (indicating an easing of home-grown wage and cost inflation) and, having stalled last month, things are again on a downward trajectory.

It’s already pushed mortgage rates lower, and made it that bit less likely that the Bank of England will have to hike the official rate again when they next meet (3 August). People remortgaging and first-time buyers will still get a shock – but not one quite as stomach-churning as it might have been.

Politically too it’s a bit of a boost for Sunak, who might actually meet his (slightly vague) promise to halve inflation to about 5 per cent by the end of the year. There’s that big investment by Jaguar Land Rover in the electric vehicle battery factory; and he’s been getting his way on the Illegal Migration Bill. For now, before the triple whammy of tomorrow’s by-elections, Sunak can enjoy his few days of good news. He needs it.

Moderating inflation will ease, but obviously not solve, the cost of living crisis. Although it’s a bit obvious, it’s worth pointing out prices generally are still rising at a very rapid rate by recent standards. If you take a two-year view, a household that’s not been able to secure a decent pay rise will have had their purchasing power cut by about a fifth in two years.

Although petrol is down and gas and electricity tariffs are also due to fall soon, food inflation is running at about 17 per cent, and that hits poorer families especially badly; and anyone with cash savings in a bank or building society account will have seen them shredded.

Looking forward, you also have to see that future welcome reductions in the rate of price increases will be as a consequence of wage inflation coming down, which probably means that the economy will weaken more widely. There is talk of a recession next year, and that then is the price we pay (to borrow an unfortunate expression) for the reduction in inflation.

Prices won’t be rising as fast in 2024 as in 2023; but neither will wages. The economy is still suffering from labour shortages and a lack of investment, exacerbated by Brexit. The fact remains that the UK has the worst record on inflation among the G7 group of larger advanced economies, and that signals a deterioration in international competitiveness.

Being gloomy, which is the occupational hazard of being an economist, you’d also have to assess the threat to the present improvements in the economic stats – including things no British government can control.

The most obvious immediate example is the war in Ukraine. Although it sounds terribly remote, the collapse of the Black Sea Grain Initiative is extremely serious. Unless there is some way of getting huge quantities of cooking oils, fertiliser and grains out of the Black Sea, that will inevitably push global inflation higher.

The same would go for any further disruption in energy supplies. The recent extreme weather conditions may also disrupt harvests world-wide – an instance of inflation generated by climate change, or “climate-inflation”. Such external shocks, as we know, are impossible to predict and hazardous to manage.

For now, though, we should cherish a little good news. It will take more than a year to see inflation approaching the Bank of England target, and there will be further real-terms cuts to living standards.

The UK economy desperately needs workers and investment, and it’s hard to see where they are going to come from, post-Brexit and in such an anti-migration environment. The next decade will probably be a very hard slog. We have, though, perhaps turned one small corner.