- Rate of inflation should continue its downward path into the autumn
- Will the BoE push ahead with a hike tomorrow?
Annual inflation dipped from 6.8 per cent in July to 6.7 per cent in August, marking a fourth month of lower headline readings. The results came as a surprise to economists, who had widely anticipated a temporary uptick in the rate of CPI this month due to higher fuel prices.
The figures will be welcome news to Bank of England policymakers who meet tomorrow, and reinforce expectations that interest rates are close to their peak. Markets now place a 50 per cent chance on the base rate staying at 5.25 per cent tomorrow, after previously backing a rise to 5.5 per cent.
Where will inflation go next?
According to the Office for National Statistics, rising prices for motor fuels led to the largest upward contribution to the change in annual rates. Yet this was not significant enough to drive a higher headline rate, with lower rates of food price and accommodation price growth making significant downward contributions.
Core inflation, which excludes volatile food and energy prices, dipped to 6.2 per cent from 6.9 per cent last month, though remains high by international standards. Services inflation, which the BOE is monitoring closely as an indicator of persistent inflationary pressure, moved from 7.4 per cent in July to 6.8 per cent.
Economists anticipate a large step down in the inflation rate in October, driven by a 7 per cent drop in the Ofgem energy cap and strong base effects. Energy bills rose sharply in October 2022, and the inflation rate should soon be flattered by these figures rolling off annual calculations.
Will the Bank of England still raise interest rates?
These positive figures will be welcome news for rate-setters, who expect UK inflation to dip below 5 per cent by the end of the year. Nevertheless, the latest core and services inflation data will fuel policymakers’ concerns about underlying inflationary pressures. On Wednesday, figures released by the OECD revealed that UK inflation would average 7.2 per cent in 2023 – the highest of any advanced economy.
Following the better-than-expected figures, both markets and economists see less scope for a further hike by the BoE tomorrow. Market pricing now implies that there is only a 50 per cent chance of a further final 0.25 point hike, when it was seen as a virtual certainty earlier in the week.
According to Berenberg senior economist, Kallum Pickering, the BoE’s decision now rests “on a knife edge”, though he still expects one more hike, taking the base rate to 5.5 per cent. He added despite the sharp fall in core inflation, price pressures remain well above the BoE’s 2 per cent target, while wage pressures are still elevated.
Charles White Thomson, CEO at Saxo UK, said the UK remained an "inflationary outlier" and pressure remained on the Bank of England to "suppress and manage inflation". He added: "We [still] expect a 0.25 point rate hike to 5.5 per cent tomorrow.”
Analysts at Capital Economics also expect a hike on Thursday. They added that higher fuel prices were unlikely to trigger a sustained rebound in inflation, meaning there was "little chance" central banks would "resume or extend tightening cycles in response”.
