UK Inflation Unexpectedly Dips to 6.7% in August, Raising Speculation of Interest Rate Hike Pause
The UK experienced a surprise decrease in inflation in August, with the headline consumer price index (CPI) falling to 6.7%. This was below expectations and has led to increased speculation that the Bank of England will pause its interest rate hikes during its policy decision announcement on Thursday.
Economists polled by Reuters had projected the headline figure to come in at 7% annually, with a 0.7% increase month-on-month. However, July saw a 6.8% annual rise and a 0.4% decline on a monthly basis.
The Office for National Statistics stated that the largest downward contributions to the monthly change in both CPIH and CPI annual rates were from food prices, which rose less in August 2023 compared to the previous year, and accommodation services, where prices fell.
On the other hand, rising prices for motor fuel led to the largest upward contribution to the change in the annual rates.
The core CPI, which excludes volatile food, energy, alcohol, and tobacco prices, decreased to 6.2% in the 12 months ending in August, compared to 6.9% in July. While the goods rate rose slightly, the services rate significantly slowed from 7.4% to 6.8%.
Raoul Ruparel, director of Boston Consulting Group’s Centre for Growth, expressed that this unexpected fall in core inflation will be particularly welcomed by policymakers, as it indicates signs of easing retail prices for consumers and suggests that real wages will continue to pick up towards the end of the year. However, he also noted that this could be a further sign of the economy slowing down.
Ruparel added, “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 is expected to announce its next monetary policy decision on Thursday as it continues its efforts to pull inflation back down to its target of 2%. The market has priced in another 25-basis-point hike, which would bring the main bank rate to 5.5%, the highest level since December 2007.
However, following Wednesday’s downside inflation surprise, market pricing for a pause from the Bank of England increased from 20% to almost 50% at around 7:40 a.m. London time.
Caroline Simmons, U.K. chief investment officer at UBS, shared her belief that the central bank will most likely proceed with the hike on Thursday but expects it to be the last one due to downward forces on inflation. She mentioned that while the recent rise in oil prices made people nervous about the inflation figure, the general trend is downwards.
Overall, the unexpected dip in UK inflation has raised speculation about a potential pause in interest rate hikes by the Bank of England. The decision, to be announced on Thursday, will be closely watched as policymakers navigate the challenges posed by an economy showing signs of cooling and the ongoing impact of rate rises.