UK

Inflation falls for sixth month running - but it might spell an end to interest rate rises?

UK inflation unexpectedly fell in August
UK inflation unexpectedly fell in August UK inflation unexpectedly fell in August

THERE is now a very real prospect that the Bank of England could pause interest rises on Thursday in the wake of a surprise fall in the UK rate of inflation.

Despite even Chancellor Jeremy Hunt warning consumers to “expect an inflation blip in September”, the headline rate actually dipped from 6.8 per cent to 6.7 per cent in August.

That's six consecutive monthly drops, and takes inflation to its lowest rate since February last year - the very beginning of the hostilities between Russia and the Ukraine.

And that unexpected fall, which wrong-footed most City analysts, might now take the pressure off the Bank of England and prompt policy-makers to pause their cycle of rate rises.

“This is very important data for the MPC's deliberations, and holding interest rates this week now looks a materially under-priced outcome,” according to Simon French, chief economist & head of research at Panmure Gordon.

And Dr Sushil Wadhwani, a former member of the Bank of England's Monetary Policy Committee (MPC), speaking on the Today programme, said: “I think it makes it less likely that the Bank of England will need to raise interest rates tomorrow.

“The Bank last time told us that there were three things that they were looking at. They were looking at whether the labour market was loosening. They were looking at what would happen to services inflation, and they would look at wages.

“Now two out of those three things have gone favourably in the sense that the labour market has loosened more than they thought, services today came in below their forecast.”

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The latest fall in the Consumer Prices Index (CPI) - which peaked earlier this year at 11.1 per cent - was partly down to falls in the costs of things like hotel stays or air travel, which can be quite volatile.

Food prices increased to 13.6 per cent in August against the same month last year, easing back from 14.9 per cent growth in July, with the largest falls coming from milk, cheese, eggs, vegetables and fish.

It means that UK consumers still face climbing prices in supermarkets as food inflation remains well in double digits.

Meanwhile, the average price of petrol rose by 5.3p per litre between July and August - compared with a much sharper drop in prices last year from a record high in July 2022.

Office for National Statistics (ONS) chief economist Grant Fitzner said: “The rate of inflation eased slightly this month 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.

“This was partially offset by an increase in the price of petrol and diesel compared with a steep decline at this time last year, following record prices seen in July 2022.

“Core inflation has slowed this month by more than the headline rate, driven by lower services prices.”