Britain’s inflation rate cooled more than expected to the lowest level in more than a year, a sign that soaring interest rates may be starting to curtail the worst wage-price spiral in the Group of Seven nations.

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The Consumer Prices Index was 7.9 percent higher than a year ago in June, a sharp drop from the 8.7 percent reading in May, the Office for National Statistics said Wednesday. It was the first downward surprise in five months and the biggest one since July 2021, below the 8.2 percent expected by economists.

Core inflation also fell to 6.9 percent from 7.1 percent, suggesting the quickest series of interest rate increases in three decades may be starting to rein in soaring prices. That may revive speculation about how many more rate hikes the Bank of England will deliver to contain prices, which are still rising almost four times quicker than its 2 percent target.

“You could almost hear the sigh of relief at the BOE,” said Valentin Marinov, head of G-10 currency research at Credit Agricole. “As a minimum, the UK rates investors could reconsider their expectations of a 50bps hike in August and may even reassess the expectation of 6% terminal rate.”

The pound extended losses, falling 0.6 percent to $1.2959. Homebuilders and retailers may get a boost from easing prices, which have weighed heavily on the ability of consumers to spend.

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Investors have fully priced in a quarter-point hike from the current 5% but were wavering about the chances of a second consecutive half-point increase. Former BOE rate-setter Michael Saunders told Bloomberg earlier this week that a headline CPI reading of more than 8.2 percent would have been “deeply alarming” while a reading below would be “somewhat reassuring.”

Services inflation — a measure being closely watched by the Bank of England for signs of domestically generated inflation — also eased to 7.2 percent in June, down from 7.4 percent the previous month.

The ONS said inflation was dragged down by falling prices for motor fuel and cooling grocery bills. Prices for food and non-alcoholic drinks climbed 17.3%, down from a 18.3 percent rise in May. Inflation in restaurant and hotel prices also dropped to 9.5 percent from 10.3 percent in May, driven by the accommodation sector, in a sign that demand may be loosening and wage pressures may be beginning to ease.

Slower inflation could undercut some bets on the pound and rate expectations. Investors have made the pound one of the best performing currencies in the Group of 10 nations this year and priced in the benchmark lending rate hitting 6.25 percent in the coming months, the highest since 1999.

That contrasts with the US, where a sharp slowdown in inflation to just 3 percent has offered hope that the Federal Reserve can soon wrap up its own rate-tightening cycle.

Slowing inflation is a relief for consumers, who have been struggling with food and energy costs, as well as a spike in mortgage rates. It also helps Prime Minister Rishi Sunak, who has promised to cut the pace of price increases in half this year from the 10.5% reading at the end of 2022.

“That’s a pleasant number for the BOE,” said Rishi Mishra, an analyst at Futures First Canada. “At 6.9 percent, core CPI is still very high, but the direction of travel is right and I think the market will shift the terminal rate closer toward 5.75%.”

Sunak, whose Conservative Party lags far behind the Labour opposition in national opinion polls, has admitted it may take longer to get inflation under control.

“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,” Chancellor of the Exchequer Jeremy Hunt said in a statement.

There were further signs of pipeline price pressures easing, which officials hope will be soon be passed on by retailers. Producer input prices fell a larger-than-forecast 1.3 percent on the month amid a drop in oil and commodity prices. They were down 2.7 percent from a year earlier, the first negative annual reading since November 2020.

The price of goods leaving factory gates fell 0.3 percent, leaving them up just 0.1 percent on the year.

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