he recent run of good news on the cost of living continued on Wednesday, as new figures show inflation defied City expectations by falling to 6.7 per cent in August, the sixth consecutive month of slowing price rises.
A rise in Consumer Price Index inflation, driven by higher oil prices in August, had been widely expected, with City experts projecting a reading of 7 per cent. Yet instead, the pace of price rises declined again from July’s 6.8%, in the latest sign that the Bank of England’s rate rises seem to be working at long last.
Chancellor of the Exchequer Jeremy Hunt said: “Today’s news shows the plan to deal with inflation is working – plain and simple. But it is still too high which is why it is all the more important to stick to our plan to halve it so we can ease the pressure on families and businesses. It is also the only path to sustainably higher growth.”
Even more encouragingly, the rate of core inflation – which strips out the more volatile food and energy components – fell from 6.9 per cent in July all the way to 6.2 per cent in August, moving away from the 30-year highs it had been close to lately.
Economists say core inflation provides a better view of how prices might change over the longer term, and the figure is watched closely by the Bank of England.
The Bank will reveal its latest interest rates decision on Thursday. While City traders strongly expected a 15th consecutive rate hike before Wednesday, the bigger-than-expected decline in core inflation puts a pause – the first since November 2021 – on the table.
George Lagarias, Chief Economist at Mazars, said: “Inflation is on the mend.
“The figure comes upon the heels of a significant upward revision to growth. While current high rates may continue to reduce economic activity, slowing inflation means that the central bank may unshackle the economy quicker than previously anticipated.”
Before the release, Investec analyst Sandra Horsfield had said a surprise decline could make the Bank consider a pause.
“A big downside surprise could potentially swing the committee towards keeping rates on hold,” she said.
And if the Bank does raise rates on Thursday, there are increased hopes that the hike will be its last before it thinks about bringing them back down.
Capital Economics chief economist Paul Dales said the decline “probably won’t be enough to prevent the Bank of England from raising interest rates by 25bps from 5.25% to 5.50% tomorrow, but it supports our view that that will be the last hike”.
However, ONS Chief Economist Grant Fitzner noted that the items that drove inflation down, mostly travel-related services, were still fairly volatile themselves.
“The rate of inflation eased slightly this month driven by falls in the often-erratic cost of overnight accommodation and air fares, as well as food prices rising by less than the same time last year,” Fitzner said.
“This was partially offset by an increase in the price of petrol and diesel compared with a steep decline at this time last year, following record prices seen in July 2022.
“Core inflation has slowed this month by more than the headline rate, driven by lower services prices.”
Politically, the surprise boosts Rishi Sunak’s hopes of achieving his goal of halving inflation by the end of the year, which would require a rate just above 5 per cent. Once seen as a relatively easy target to meet, it appeared to be at risk as inflation remained unexpectedly high during the Spring.
But Labour’s Shadow Chancellor Rachel Reeves highlighted the fact that the UK’s inflation rate is still above most peer nations.
“The UK is forecast to have the highest Inflation of any major economy this year,” she said. “The Prime Minister is too weak to turn things around, while his predecessor Liz Truss continues to call for the same policies that crashed the economy this time last year.”
The unexpected dip in inflation follows recent figures that suggested the Bank’s interest rate hikes were already slowing the economy. GDP declined by 0.5 per cent in July, and early indicators suggest August performance may be sluggish as well. Many economists have argued that an economic slowdown is necessary to cool the pace of price rises.
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