UK Inflation Softens In August

UK consumer price inflation unexpectedly slowed to an 18-month low in August, official data showed ahead of the Bank of England’s monetary policy announcement on Thursday, raising chances of a pause in the interest rate hike cycle.

The consumer price index posted an annual increase of 6.7 percent in August after rising 6.8 percent in July, the Office for National Statistics reported Wednesday.

This was the weakest CPI inflation since February 2022. Moreover, the rate slowed when it was expected to rise to 7.0 percent.

The large downward effects from restaurants and hotels, and food prices offset upward contributions from transport and housing services.

Excluding energy, food, alcohol and tobacco, core inflation weakened notably to 6.2 percent from 6.9 percent in the previous month.

Further, services inflation softened to 6.8 percent in August from 7.4 percent a month ago.

Capital Economics’ economist Paul Dales said the BoE will raise interest rates by a quarter-point tomorrow, although the chances that the bank leaves rates unchanged are higher.

“Overall, when taken together with the recent loosening in the labor market and weakening in real activity, the easing in core inflation may mean that the Bank can call time on interest rate hikes, probably after tomorrow,” Dales added.

The BoE decision is a close call, and both wage and inflation data suggest the end of the current tightening cycle is very close to its conclusion, ING economist James Smith said.

As seen in August, a three-way split on the nine-member Monetary Policy Committee, led by Governor Andrew Bailey, is more likely tomorrow.

The central bank has increased its policy rate over the last 14 consecutive sessions. At 5.25 percent, the bank rate is currently the highest since early 2008.

On a monthly basis, the CPI rose 0.3 percent, in contrast to the 0.4 percent fall in July, ONS data showed. Prices were forecast to rebound 0.7 percent in August.

Separate data from the ONS showed that annual producer price inflation rates remained negative recently but the index levels for both input and output prices were substantially higher than their 2021 levels.

Output price inflation was negative for the second consecutive month in August. Nonetheless, the annual fall in output prices slowed to 0.4 percent from a revised 0.7 percent in July. Prices were expected to drop 0.6 percent.

At the same time, input price inflation remained negative for the third consecutive month. Input prices declined at a slower pace of 2.3 percent after falling 3.2 percent a month ago. The pace of drop was also smaller than the expected 2.7 percent decrease.

Compared to the previous month, the output price index registered a 0.2 percent increase, the same rate of rise as seen in July.

Input prices climbed for the first time in five months. They rose 0.4 percent month-on-month, offsetting the 0.4 percent decrease in July.

In a separate release, the ONS said the average house price annual inflation was 0.6 percent in July, which was down from 1.9 percent in June and also the recent peak in annual inflation of 13.8 percent in July 2022.

Average house prices rose by GBP 2,000 from a year ago to GBP 290,000 in July.

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