UK inflation dropped to 6.7% in August, according to the latest figures from the Office for National Statistics (ONS). The better-than-expected numbers (analysts had expected inflation to rise to 7% from 6.8% in July) are likely to put less pressure on the Bank of England (BoE) to hike interest rates further from current levels.
August’s figure was driven by “falls in the often-erratic cost of overnight accommodation and air fares, as well as food prices rising by less than the same time last year.” These declining figures offset rising petrol prices, which put upward pressure on the headline inflation figures.
More importantly, core inflation, which strips volatile food and energy costs, and is a better indicator of the long-term growth of prices, fell to 6.2% in August. Economists were predicting a figure of 6.8% for August compared to the July print of 6.9%.
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The latest update on inflation will come as a relief to policymakers and consumers in the UK.
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As Daniel Casali, chief investment strategist at wealth management firm Evelyn Partners notes, “Back in October last year, annual headline CPI inflation had reached 11.1%, but it has since fallen by 4.4%. Much of that deceleration has come from lower energy prices in the transport (i.e. fuel) and housing and household services (i.e gas and electricity) categories.”
“Despite pockets of inflationary pressures (i.e rents), the broad deceleration trend in inflation is intact and this increases the likelihood that the BoE is close to the end of its interest rate-hiking cycle,” Casali adds.
The BoE has hiked interest rates aggressively over the past year as it has tried to bring inflation back to its 2% target. The central bank’s base rate currently stands at 5.25% and it is widely expected the bank’s Monetary Policy Committee (MPC), which sets rates, will unveil another 0.25% hike tomorrow.
But moderating inflation suggests the BoE might be close to the end of its hiking cycle. As Victoria Scholar, head of investment at interactive investor notes, “markets are now pricing in a 45% chance of no change to interest rates on Thursday, a steep increase from 20% on Tuesday. However, it looks like interest rates will remain high for some time, with little chance of a rate cut before the second half of next year.”
Nevertheless, the economy is not out of the woods just yet, “Wages are rising rapidly, sterling still remains weak and oil prices are going up,” notes Charlie Huggins at Wealth Club.
Although for now, “ the trend is in the right direction. While price rises are still much higher than anyone would like, there is no longer a sense that inflation is out of control."
