Interest rates are predicted to rise less sharply after the UK saw a surprise drop in inflation in June.
The Bank of England has put up rates 13 times since December 2021 to try to cool soaring price rises, driving up borrowing costs for millions.
But experts say it is now under less pressure to do so after inflation fell sharply to 7.9% in June, down from 8.7% the previous month.
It means UK inflation has fallen to its lowest level in more than a year.
Falling fuel prices contributed to the drop in June, while food prices are rising less quickly.
However, experts cautioned that the UK’s inflation rate remains almost four times higher than the official target – and far above other developed countries.
“It is a large drop but let’s forget that last month we saw no change at all in headline inflation so in some ways what we are seeing this morning is catching up with the falls we’ve seen in other similar countries,” Grant Fitzner, chief economist at the Office for National Statistics (ONS), which publishes the figures, told the BBC’s Radio 4’s Today Programme.
“It still looks like we may have the highest rate of inflation in the G7 [group of developed nations], so still some way go.”
In the US, inflation is 3%, and in the eurozone it is 5.5%.
Prices of food, energy and services have shot up since last year, squeezing households.
In response the Bank of England has put up interest rates 13 times since December 2021 to try to ease inflation, which is the rate at which prices rise over time.
It hopes that by making borrowing more expensive, consumers will spend less and price rises will cool. However, inflation has remained stubbornly high, worrying policymakers.
Rising interest rates have also driven up mortgage borrowing costs to their highest level in 15 years, leaving millions of homeowners facing higher monthly repayments.
It appears that most measures of inflation are now heading in the right direction, with inflation expected to fall below 7% next month, as drops in household energy bills impact the numbers.
So called core inflation – which strips out volatile elements like fuel and energy prices – also dipped in June.
However, annual food price inflation remained stubbornly high at 17.3%.
It means the Bank of England is still expected to raise interest rates again at its next decision in two weeks. Last month it hiked rates to 5% from 4.5%. This time it is expected to opt for a smaller rise of 0.25 percentage points.
When inflation is falling it does not mean prices fall too, just that they rise less quickly.
However James Smith, research director at the Resolution Foundation, which campaigns to improve living standards, said June’s “chunky inflation rate fall” offered some “unambiguously good news” after months of disappointing data on the state of the economy.
“The scale of the fall will ease pressure on mortgages and wages, with the Bank of England less likely to keep interest rates higher for longer.”
He added that an 18-month squeeze on peoples real wages, which account for rising prices, was “coming to an end”.
But Yael Selfin, chief economist at KPMG UK, said that while inflation was likely to continue falling in the coming months, it would not return to the Bank of England’s 2% target before early 2025.
As such, the Bank is “unlikely to substantially change its hawkish policy stance” on interest rates in the short term.
Chancellor Jeremy Hunt welcomed June’s inflation figures but said the government wasn’t complacent. “We know that high prices are still a huge worry for families and businesses”.
But Rachel Reeves, Labour’s shadow chancellor, said inflation had been “persistently high and remains higher than our international peers”.
“Prices are still going up at staggering rates and that they’re bearing the brunt of those costs.”
