UK inflation fell unexpectedly in August
Inflation across the United Kingdom fell unexpectedly in August to its lowest level since Russia launched its invasion of Ukraine, a development that has reined in expectations of a 15th straight interest rate increase from the Bank of England in its rate decision today, Thursday.
The Office for National Statistics said Wednesday that price rises, as measured by the consumer prices index, moderated to 6.7 per cent in the year to August, down from 6.8 per cent in July. The decline took inflation to its lowest level since February 2022, when Russia’s invasion of Ukraine led to soaring energy and food prices.
The ONS credited the fall to lower hotel and airfare costs and a moderation in food price rises. These helped offset an increase in energy costs on the back of higher crude oil prices.
The decline was unexpected. Most analysts had expected inflation to increase to around seven per cent in light of the bump in prices at the pump.
Though inflation is way above the Bank of England’s target of two per cent and higher than any other Group of Seven major advanced economy, the decline has eased expectations of another rate hike.
Before the figures were released, most economists thought the bank would raise its main borrowing rate once again by a quarter of a percentage point to a near 16-year high of 5.5 per cent. Now, markets foresee that the decision could go either way.
Even if there is a rate hike, economists expect the bank to indicate that borrowing rates have peaked – to the relief of millions of homeowners who are facing higher mortgage rates.
“This will strengthen the case that the bank’s 14 consecutive interest rate rises are now showing clear signs of putting downward pressure on inflation, and that its rate-rising cycle will soon end,” said James Smith, research director at the Resolution Foundation think tank.
For many homeowners, the pain has yet to hit, though. Unlike in the United States, for example, most homeowners in Britain lock in mortgage rates for only a few years, so those whose deals expire soon know that they face much higher borrowing costs in light of the sharp rise in interest rates over the past couple of years.
Like other central banks around the world, the Bank of England has raised interest rates aggressively from near zero as it seeks to counter price rises first stoked by supply chain issues during the coronavirus pandemic and subsequently Russia’s invasion of Ukraine. Inflation hit a peak of 11.1 per cent in October 2022.
AP