In an unexpected turn of events, the United Kingdom witnessed a dip in inflation, with the annual rate falling to 6.7% in August, defying market expectations. This surprising development has ignited speculation of a potential pause in interest rate hikes by the Bank of England in its upcoming decision on Thursday.
On a monthly basis, the headline Consumer Price Index (CPI) recorded a 0.3% increase. Economists surveyed by Reuters had anticipated an annual CPI figure of 7% and a 0.7% month-on-month rise, driven in part by a slight uptick in fuel prices. July had seen a 6.8% annual increase and a 0.4% month-on-month decline.
The Office for National Statistics attributed the decline in inflation to reduced food prices, which rose less in August 2023 compared to the previous year, along with fluctuations in accommodation services pricing, which decreased during the same period. Rising motor fuel costs, however, had the most significant impact on the change in annual rates, pushing them upward.
Core CPI, which excludes the volatile categories of food, energy, alcohol, and tobacco, stood at 6.2% for the 12 months ending in August, down from July’s 6.9%. While the goods rate slightly increased from 6.1% to 6.3%, the services rate saw a notable slowdown from 7.4% to 6.8%.
Raoul Ruparel, Director of Boston Consulting Group’s Centre for Growth, noted that this unexpected drop in core inflation would be well-received by policymakers, along with signs of decreasing retail prices for consumers. Ruparel stated that these developments, combined with nominal wage growth, suggest that real wages will continue to rise toward the year’s end. However, he also pointed out that this signifies a slowdown in the economy.
Despite this, Ruparel believed that the Bank of England would proceed with another interest rate hike. He suggested that today’s data might bolster those advocating for this to be the final rate increase but also highlighted the central bank’s challenge as the economy displays signs of cooling while the full effects of the rate hikes remain unknown.
The Bank of England is set to announce its next monetary policy decision on Thursday, as it strives to curb inflation and align it with the bank’s 2% target. Market expectations have largely priced in a 25-basis-point rate hike, which would raise the main bank rate to 5.5%, its highest level since December 2007.
Following the unexpected inflation dip on Wednesday, market pricing for a pause from the Bank of England surged from 20% to nearly 50% at around 7:40 a.m. London time. Despite this shift, Caroline Simmons, U.K. Chief Investment Officer at UBS, suggested that the central bank would likely proceed with the hike on Thursday, with the expectation that it might be the last, given the downward pressures on inflation.
Simmons highlighted that the recent surge in oil prices had caused some nervousness regarding the inflation trend, but the general trajectory remained downward.
