Daily Management Review

UK Inflation Drops To 6.7%, Less Than Anticipated, As Food Costs Decline


UK Inflation Drops To 6.7%, Less Than Anticipated, As Food Costs Decline
Inflation in the UK unexpectedly fell to 6.7% in August, which was below estimates and strengthened wagers on the Bank of England pausing interest rate increases on Thursday.
The headline consumer price index (CPI) increased by 0.3% on a monthly basis.
According to economists surveyed by Reuters, the headline figure would be 7% annually and up 0.7% month over month despite a modest increase in petrol costs. In July, there was a 6.8% yearly increase and a 0.4% month-to-month decrease.
“The largest downward contributions to the monthly change in both CPIH and CPI annual rates came from food, where prices rose by less in August 2023 than a year ago, and accommodation services, where prices can be volatile and fell in August 2023,” the Office for National Statistics said.
“Rising prices for motor fuel led to the largest upward contribution to the change in the annual rates.”
The core CPI, which does not include volatile prices for food, energy, alcohol, and tobacco, was 6.2% in the year ending in August, down from 6.9% in July. The services rate notably slowed from 7.4% to 6.8%, more than offsetting the minor increase in the goods rate from 6.1% to 6.3%.
This surprise decline in core inflation, together with indications that retail prices are beginning to soften for consumers, will be especially appreciated by policymakers, according to Raoul Ruparel, director of Boston Consulting Group's Centre for Growth.
“This, combined with nominal wage growth, suggests real wages will continue to pick up towards the end of the year. Together, this will be a relief for households, but it is also a further sign that the economy looks to be slowing,” Ruparel said in an email on Wednesday.
“We believe the Bank of England will still raise rates tomorrow, but today’s data will embolden those pushing for this to be the final rate hike. However, it also highlights the challenge for the Bank of England with the economy now showing signs of cooling and the full impact of the rate rises not being felt.”
On Thursday, the Bank of England will publish its upcoming monetary policy decision as it works to bring inflation back down to its target of 2%.
The main bank rate would increase by another 25 basis points to 5.5%, its highest level since December 2007, according to market expectations.
Market expectations for a pause from the Bank of England increased from 20% to over 50% at roughly 7:40 a.m. London time in response to the Wednesday downward inflation surprise.
According to Caroline Simmons, UBS's chief investment officer for the United Kingdom, the central bank will likely raise interest rates on Thursday.
“We do believe that’s going to be their last hike, however, because we do have these downward forces on inflation,” she added.
“I think the recent rise in the oil price made people nervous that the print this morning might not continue to fall, which is why people sort of had more upside risk to their numbers, but I think the general trend is down.”