UK inflation fell to 6.7%, below expectations as food prices fell

A shopkeeper sells fruit and vegetables at an indoor market in Sheffield, England. The OECD recently predicted that the UK will experience the highest inflation of all advanced economies this year.

Bloomberg | Bloomberg | Good pictures

UK inflation surprised by falling to 6.7% in August, below expectations and the Bank of England suspended an interest rate hike on Thursday.

On a monthly basis, the headline Consumer Price Index (CPI) increased by 0.3%.

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

“The largest downward contributions to the monthly change in both the CPHI and CPI annual rates came from food products, where prices fell in August 2023 from a year ago, and accommodation services, where prices are expected to be stable and fall in August 2023,” the Office for National Statistics said.

“Rising prices for motor fuel led to the largest upward contribution to the change in annual prices.”

Core CPI – excluding volatile food, energy, alcohol and tobacco prices – was 6.2% in the 12 months to the end of August, up from 6.9% in July. The goods ratio rose slightly from 6.1% to 6.3%, but was offset by a decline in the services ratio from 7.4% to 6.8%.

Raoul Ruberel, director of Boston Consulting Group’s Center for Growth, said the unexpected drop in core inflation will be welcomed, especially by policymakers, with signs that retail prices are beginning to ease for consumers.

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“This, combined with nominal wage growth, suggests that real wages will continue to rise later this year. Together, this will be a relief for families, but it also shows that the economy is slowing.” Ruparal said in an email on Wednesday.

“We believe the Bank of England will continue to raise rates tomorrow, but today’s data will cheer those pushing for this as the final rate hike. However, the economy is now showing signs of cooling and this highlights the challenge for the Bank of England. The full impact of a rate hike is not being felt.”

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

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

In light of Wednesday’s inflation shock, the market price for the Bank of England’s pause rose from 20% to nearly 50% by 7:40 a.m. London time.

Caroline Simmons, UK chief investment officer at UBS, told CNBC that the central bank will be more dovish on Thursday.

“However, we believe this is their last hike because we have these downward forces on inflation,” he added.

“I think the recent rise in oil prices has made people nervous that the axis may not continue to fall this morning, and that’s why people are risking upside in their numbers, but I think the general trend is bearish.”

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