Inflation has fallen to 6.8% in the year to July, new data from the Office for National Statistics (ONS) shows, with the consumer price index (CPI) down from 7.9% in June.
It marks the second month in a row that the rate of inflation has dipped sharply.
Falling gas and electricity prices provided the largest downward contributions to the monthly change, while a slower rise in food prices helped ease inflation rates.
The decline sees prices increasing at a less rapid rate than wages, indicating further pressure for the Bank of England to raise interest rates next month.
Moreover, core inflation, which takes out energy, food, alcohol and tobacco to give a clear picture of underlying trends, was unchanged from 6.9% in June.
Alpesh Paleja, CBI lead economist, said: “A big fall in inflation was widely expected in July, given the 37% cut to Ofgem’s energy price cap. However, the Bank of England will be more concerned about signs of persistent domestic price pressures. In particular, the latest data points to continually strong wage growth, which means that more interest rate rises are in the pipeline.
“Inflation will continue to fall through the remainder of this year. While this is welcome news for households, the Bank has been clear that they’re willing to keep interest rates higher for longer if needed, to reign in price pressures. So, at least for the time being, tighter financial conditions for households and businesses look like they’re here to stay.”
Martin McTague, national chair of the Federation of Small Businesses (FSB), said: “While a drop in inflation provides some comfort, today’s figures show less of a drop in inflation than hoped for, and will renew fears of a wage-price spiral, and of yet more base rate hikes in future.
“The worry now is that rising wages ignite a fresh wave of inflation in September, which will threaten the momentum from June’s GDP growth.
“The cost of doing business crisis still has a grip on the small business community, as prices for many key inputs, from energy to components and raw materials, remain far above where they were a year ago.
“Any reduction in inflation is good news, but the huge toll that spiralling prices have inflicted is still being keenly felt by small firms.
“Despite the inflationary pressures that we’ve seen for more than a year, more small businesses have seen their revenues shrink over each of the last five quarters than have seen them increase, according to our research.
“Small business confidence levels fell back in the second quarter, with stickier-than-expected inflation alongside interest rate increases playing a major part in that. We very much hope that these inflation figures continue on a downward trend in Q3, to give confidence among small firms a chance to recover.
“Yesterday’s record wage increase figures will however make the path back to lower inflation and lower interest rates more complicated, while the news that GDP rose by 0.5% in June makes the job of maintaining recovery while bearing down on inflation a tricky one.
“With low interest rate deals on loans and finance options near-impossible to find, small firms looking to grow will be keeping their fingers crossed that the end of base rate rises is in sight.
“We’re calling on the Government to use the rest of the summer to plan a growth agenda for small firms, and tackling late payment should be top of the list. Having to chase overdue payments is a huge drain on small firms’ resources, increasing their cost of doing business and making them more likely to have to apply for finance to manage their cashflow.”
Remaining stubborn, inflation sits much higher than the Bank of England’s 2% target.
