'Grounds for cautious optimism': Surprise inflation fall is 'barely significant statistically', says ex-head of Treasury

19 July 2023, 19:05 | Updated: 19 July 2023, 19:10

Lord Macpherson says there are still 'grounds for cautious optimism'.
Lord Macpherson says there are still 'grounds for cautious optimism'. Picture: LBC/Getty/ONS

By Jenny Medlicott

Inflation falling to 7.9% is 'good news' but Brits 'shouldn't get too overexcited', the former head of the Treasury has told LBC.

Inflation fell from 8.7% in May, using the consumer price index, which was a bigger slow down in price rises than expected.

But Nick Macpherson, the former Permanent Secretary to the Treasury, said that while “this is the first bit of good news we've had on inflation” we’ve had for a while, it remains “grounds for cautious optimism”.

Speaking on LBC's Tonight With Andrew Marr, Lord Macpherson said: “We shouldn't get too overexcited. This is just one month's figure which is slightly better than expected. Last month, it was worse than expected. There's quite a lot of noise in these numbers. Nevertheless, inflation is coming down.

“We've also got to remember that prices are still rising. They're just rising slightly less quickly than they were before.”

As the data was published on Wednesday morning, Grant Fitzner, the chief economist for the Office for National Statistics’ attributed the “substantial” slowdown of inflation to the drop in motor fuel prices.

It is the slowest annual rate of inflation since March 2022, the first month after Ukraine was invaded, Grant Fitzner said.

Quizzed on whether the news was good for core inflation, Lord Macpherson replied: “Well, relatively, it's, I think, come off by sort of 0.1%, which is barely significant statistically. And we should be focused on the core inflation.

“As I said, there's there's noise around these figures to do with food, energy and so on. But, you know, as I said, there are grounds for cautious optimism.”

Read more: Lowest inflation rate for a year brings some relief to struggling families - but 7.9% still 'far too high'

Read more: Rishi Sunak says drop in inflation rate shows government's 'plan is working'

The ONS data shows inflation fell to 7.9%.
The ONS data shows inflation fell to 7.9%. Picture: Office for National Statistics

And as for mortgage rates, the expectation remains that they will continue to rise.

Lord Macpherson said: “Interest rates may not have to go up quite as much as we feared yesterday, but the presumption is still that they will go up further.

“And bear in mind that most mortgage holders are on fixed mortgages, which haven't been renewed for two, four, even five years. If those are coming up for renewal, your mortgage payments will be a lot higher than before.”

“There's pain still to come, if you’re borrowing if you're safer – assuming the banks pass on the benefits, you should be getting some interest on your savings.”

And asked whether this was the end of cheap money, money borrowed at a low interest rate, Lord Macpherson said: “I think it is. I think central banks kept interest rates too low for too long, and over the last 18 months they've been playing catch up.

“That probably means that interest rates will end up going higher than they probably needed to. But cheap money was a perfectly reasonable response to some of the extreme crises we faced going back to the banking crisis”.

Food price inflation has also eased, but it remains “at very high levels”.

Rishi Sunak on Wednesday afternoon.
Rishi Sunak on Wednesday afternoon. Picture: Getty

It comes after Rishi Sunak pledged to halve inflation as one of his key policy priorities after becoming prime minister. At that time, it was above 10%.

Mr Sunak said on Wednesday afternoon: "What we saw with the inflation figures is that our plan is working. I know things are difficult for people right now, but I'm determined to bring inflation down.

"Today's figures should give people some comfort that the plan is working. I'm going stick the course." Chancellor Jeremy Hunt said: "Inflation is falling and stands at its lowest level since last March; but we aren't complacent and know that high prices are still a huge worry for families and businesses.

"The best and only way we can ease this pressure and get our economy growing again is by sticking to the plan to halve inflation this year."

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