Lower energy price cap commenced

The lower energy price cap that commenced in July led to another material drop on the headline rate of CPI, according to UK Finance's Household Finance Review for the second quarter of 2023, published in August 2023¹. The review said the fall in CPI to 7.9 per cent in June was broadly in line with the Bank of England's expectations, and that the July cap change would push the headline rate down further¹.

The review set out the wider inflation picture across the quarter. CPI fell into single digits in May for the first time since August of the previous year, then fell to 7.9 per cent in June¹. Food price inflation remained in double digits but was heading downwards, and transport costs were falling, with petrol prices down on a year earlier¹. Core inflation, which excludes food and energy, was described as sticky, and services inflation had been stuck above seven per cent since May¹.

UK Finance said the end of the squeeze on real incomes was in sight, but that bringing CPI inflation back to target was not expected until 2025¹. In response, the Bank of England raised Bank Rate in August by a further quarter point to 5.25 per cent¹. The review said forecasters expected rates were near their peak, with perhaps one more rise at the Monetary Policy Committee's September meeting, a lower expectation than in its Q1 2023 review¹.

The review also described how households were managing. Consumer confidence continued to recover from the historic low reached after the September mini-budget, though it remained fragile and July readings were less upbeat¹. Household spending was the main contributor to GDP growth in the quarter, expanding by 0.7 per cent in the three months to June, the strongest reading since the first quarter of 2022¹. Card spending picked up through the quarter, partly reflecting price pressures raising the average spend per transaction¹.

On borrowing, UK Finance reported that the significant contraction in house purchase lending that began in the first quarter continued in the second, as cost-of-living pressures and higher interest rates raised the bar for affordability¹. Mortgage arrears rose for the third consecutive quarter, though the total level remained very low by historic standards¹. Possessions fell slightly and remained at historically very low levels¹. Households were drawing down on savings to meet higher expenses, though in aggregate substantial excess savings built up during the pandemic remained¹.

Why it matters for households

The July cap change fed directly into the headline inflation rate that shapes how far household budgets stretch, and the review links lower energy prices to at least some of the lift in consumer confidence during the quarter¹. Energy prices remained significantly higher than before 2022, but much lower than their peak, which UK Finance said would have made a material difference for many¹.

For borrowers, the picture was tighter. The review records Bank Rate at 5.25 per cent from August 2023, with forecasters expecting rates near their peak but perhaps one further rise in September¹. Arrears rose for a third consecutive quarter, and the review notes that borrowers refinancing at the end of a fixed-rate deal were still on rates well below those at which their ongoing affordability had previously been stress-tested¹. The government's Mortgage Charter was described as a popular self-serve option, though the review said the significant increase in longer-term borrowing seen up to that point limited its effectiveness for newer first-time buyers¹.

The review also notes that while the trajectory of headline inflation was encouraging, the path back to the MPC's two per cent target was not expected to be smooth, partly because of continued wage growth¹. Regular pay across the economy was 7.8 per cent higher in the three months to June than a year earlier, the fastest growth since the series began in 2001, and pay including bonuses stood at 8.2 per cent¹.

What happens next

The review, published in August 2023, said forecasters expected subdued growth in the second half of the year, with GDP for 2023 as a whole around 0.4 per cent¹. It said the Bank of England's August rise to 5.25 per cent could be followed by perhaps one further increase at the September meeting¹. It also said bringing CPI inflation back to target was not expected until 2025¹. No further dated steps beyond those are reported.