The Office for National Statistics' announcement that consumer price inflation had fallen to 2.1 per cent in June was greeted with relief in financial markets and cautious optimism in government. For the Bank of England, which has spent two years raising and then holding interest rates in an effort to bring inflation under control, it represents a vindication of sorts.
For most households, the reaction is more muted. Inflation at 2.1 per cent means prices are still rising. 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. The fall in the rate does not undo any of that.
Regional Variation
The national figure conceals significant regional variation. Households in the north of England, where energy costs represent a larger share of household budgets and where wage growth has been weaker, have experienced the cost-of-living crisis more acutely than those in the south-east. The recovery, such as it is, is similarly uneven.
Data from the Resolution Foundation shows that real wage growth is concentrated among higher earners and in sectors — technology, finance, professional services — that are disproportionately concentrated in London and the south-east. For workers in lower-paid, less secure employment in the regions, the picture is more complicated.
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.
"The headline number is moving in the right direction. The question is whether that movement is being felt by the people who need it most." — Economist, Resolution Foundation
What Comes Next
The Bank of England is expected to cut interest rates at its next meeting. That would reduce borrowing costs for variable-rate mortgage holders and, over time, for consumers more broadly. The pass-through is slow, but it is real.
Whether that translates into a felt improvement in living standards depends on factors that monetary policy cannot address: housing costs, childcare, the state of public services. Those are political questions. The inflation figure is a piece of good news. It is not the whole story.