A shopper browses fruit and vegetables for sale at an indoor market in Sheffield, UK. The OECD recently predicted that the UK will experience the highest inflation among all advanced economies this year.

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U.K. inflation came in at 6.7% in August, below expectations and down slightly from the previous month.

On a monthly basis, the headline consumer price index (CPI) rose by 0.3%.

Economists polled by Reuters expected the headline figure to come in at 7% annually and up 0.7% month-on-month amid a slight uptick in prices at the pump. July saw a 6.8% annual rise and a 0.4% month-on-month decline.

“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.”

Core CPI — which excludes volatile food, energy, alcohol and tobacco prices — came in at 6.2% in the 12 months to the end of August, down from 6.9% in July. The goods rate rose slightly from 6.1% to 6.3% but was more than offset by the services rate slowing significantly from 7.4% to 6.8%.

Raoul Ruparel, director of Boston Consulting Groups’ Centre for Growth, said this unexpected fall in core inflation would be particularly welcomed by policymakers, along with signs that retail prices are beginning to ease for consumers.

“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.”

The Bank of England will announce its next monetary policy decision on Thursday, as policymakers continue efforts to pull inflation back down towards the Bank’s 2% target.

The market has broadly priced in another 25-basis-point hike to interest rates, which would take the main bank rate to 5.5% — its highest level since December 2007.

Despite the downside inflation surprise of Wednesday, the market is still pricing around an 80% probability of this further hike, according to live LSEG swaps data.

Caroline Simmons, U.K. chief investment officer at UBS, told CNBC that the central bank will still most likely hike 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.”

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