When the Office for National Statistics announced that consumer price inflation had fallen to 2.1 per cent in June, the reaction in Westminster was predictably enthusiastic. Ministers spoke of a turning point. The Bank of England noted progress. Financial markets priced in a rate cut.
The reaction in most households was rather more muted. Because while the rate of inflation has fallen, prices have not. Everything that cost more last year still costs more. The fall in the inflation rate means things are getting more expensive more slowly — a distinction that matters enormously in economic theory and rather less in a supermarket aisle.
The Persistence of High Prices
Energy bills remain the most significant pressure point. The energy price cap has fallen from its peak, but it remains well above pre-crisis levels. The government's direct support payments — the Energy Price Guarantee, the Cost of Living payments — have ended. Households that were receiving that support are now managing without it.
Food prices have stabilised but not reversed. The average weekly grocery bill for a family of four is still roughly 18 per cent higher than it was in 2021, according to supermarket data. The shift towards own-brand and value products that began during the worst of the crisis has not reversed. Shoppers have adapted, but the adaptation has a cost.
Who Benefits from Lower Inflation
Lower inflation does benefit some households more directly. Those with variable-rate mortgages or savings accounts will benefit if the Bank of England cuts rates, as markets expect. Workers in sectors with strong wage growth — technology, finance, parts of the public sector — have seen real wages rise as inflation has fallen.
But the distribution of these gains is uneven. The Resolution Foundation has noted that real wage recovery is concentrated among higher earners. For the bottom third of the income distribution, the picture is complicated by benefit changes, housing costs and childcare expenses that offset some of the gains from higher nominal wages.
"The aggregate figures look better. The question is whether the aggregate is a useful description of what most people are experiencing." — Economist, Resolution Foundation
What Comes Next
The Bank of England's next decision on interest rates will be closely watched. A cut would reduce borrowing costs for those on variable-rate mortgages and those coming to the end of fixed-rate deals. It would also, eventually, reduce the cost of consumer credit. The pass-through is slow, but it is real.
Whether that translates into a felt improvement in living standards depends on factors that interest rate decisions cannot address: the cost of housing, the availability of childcare, the state of public services. Those are political questions, and the answers to them are not contained in any inflation figure.