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UK prices rose much less than expected in August, lowering the annual rate of inflation to 6.7 per cent and putting pressure on the Bank of England to pause its long run of interest rate rises on Thursday.
The Office for National Statistics’ figures came as a surprise to economists, who had predicted a rise in inflation from 6.8 per cent in July to 7 per cent in August, and led to a rapid sell off in sterling as traders recalculated their expectations of interest rates.
In early trading, the pound was down 0.3 per cent against the dollar to $1.2355 in early morning trade, its lowest level since May, and 0.4 per cent against the euro.
Financial markets and economists were most surprised that prices rose less during the month of August this year than they did last year, even though petrol and diesel prices had jumped on the back of higher crude oil costs.
This was caused by a decrease in restaurant prices in the month and much more moderate price rises this August in goods and services related to pets and recorded media.
In the month of August alone, consumer prices rose 0.3 per cent, much less than the 0.7 per cent expected by economists.
Underlying measures of annual inflation, which are closely watched by the central bank, were down sharply. Core inflation, excluding food, energy, alcohol and tobacco, stood at 6.2 per cent in August, down from 6.9 per cent the previous month. Economists had expected no change.
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The price of services increased by 6.8 per cent in August compared with a year earlier, a lower rate than 7.4 per cent in July.
BoE officials have said they would raise interest rates for the 15th consecutive time from the current 5.25 per cent level if they saw signs of persistent inflation, and Wednesday’s data will give them pause for thought.
Although wage growth has been stronger than expected, the signs of moderation across most goods and services suggested that the rate rises since late 2021 from close to zero to 5.25 per cent might have done enough to restore price stability.
After failing to predict August’s inflation, most economists still thought the BoE’s Monetary Policy Committee would nevertheless increase the cost of borrowing on Thursday.
Paul Dales, chief UK economist at the consultancy Capital Economics, said: “We still think the bank will raise interest rates by 0.25 percentage points tomorrow, although the risk that the bank leaves rates unchanged and rates have already peaked has just increased.”
Yael Selfin, chief economist at advisory firm KPMG UK, said that the 25 per cent increase in oil prices since June would mean inflation would moderate slowly, so the MPC was still likely to vote for an increase.
“We expect inflation to return to [the 2 per cent] target only by the latter part of 2024, as businesses continue to pass on higher costs in order to rebuild margins. Under these circumstances, it would be surprising to see the BoE doing anything other than raising interest rates by 0.25 percentage points tomorrow,” she said.
But an increasing minority said it would be a mistake.
Suren Thiru, economics director at the Institute of Chartered Accountants in England and Wales, said the “surprising drop in inflation suggests that the UK is winning the battle against soaring prices”.
Noting the long lags between interest rate rises and the effects on inflation, he said, “additional tightening unnecessarily risks aggravating the financial struggles facing households and businesses”.
Chancellor Jeremy Hunt welcomed the ONS figures but cautioned that inflation “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”.
