UK Inflation Falls to Lowest Level Since February 2022, Easing Pressure on Bank of England
Annual inflation in the UK fell to 6.7% in August, down from 6.8% in July, providing some respite for Bank of England Governor Andrew Bailey. The figure surprised the market, which had anticipated a rise to 7%. The decrease was attributed to domestic disinflationary forces, which offset a nearly 30% increase in oil prices.
According to Capital Economics, higher petrol prices added approximately 0.3 percentage points to the consumer price index, but this was balanced out by a 0.2% month-on-month decline in restaurant and hotel bills. There was also a slowdown in the rise of food and non-alcoholic beverage prices. The core CPI, which excludes energy, food, alcohol, and tobacco, rose by 6.2% year-on-year in August, a significant deceleration from July’s 6.9%.
Despite the drop in inflation, the Bank of England’s decision on whether to raise interest rates on Thursday remains uncertain. Derivatives prices collected by LSEG indicate that investors are evenly split, with a 50/50 chance of a 25 basis point increase to 5.5% or a pause in rate hikes.
Governor Bailey now faces the challenge of determining the next steps for monetary policy. His previous strategy was to maintain rates at their current levels until inflation aligns with the Bank of England’s 2% target, a goal that may not be achieved until late 2024 at the earliest. However, as disinflation gains momentum and the domestic economy weakens, pressure from both consumers and politicians to cut rates is likely to increase.
The latest inflation figures provide a glimmer of hope for the UK economy, but the long-term implications of the country’s inflationary pressures remain uncertain. As the Bank of England weighs its options, the decision on interest rates will have far-reaching consequences for businesses and consumers alike.
More detail via Reuters here… ( Image via Reuters )