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- UK CPI rate falls to 9.9% in August from 10.1%
- Economists warn that the CPI will rise again later in 2022
- The sharp drop in fuel prices pushes the CPI down
- The BoE expected to raise rates again next week
LONDON, Sept 14 (Reuters) – Britain’s consumer price inflation fell for the first time in almost a year in August as falling fuel prices provided unexpected – and likely brief – respite for households and the Bank of England.
Annual consumer price growth slowed to 9.9% from July’s 40-year high of 10.1%, the Office for National Statistics said on Wednesday. That was its first drop since September 2021 and below expectations in a Reuters poll for a rise to 10.2%.
However, economists warned that inflation was likely to hit around 11% in October when a new cap on household energy tariffs kicks in, and said it could take time to ease due to pressures underlying and the government’s new fiscal incentives.
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“The Bank of England will have to keep turning the screws,” said Paul Dales, chief UK economist at consultancy Capital Economics.
Britain’s central bank was expected to raise interest rates on Thursday, but delayed the decision a week after Queen Elizabeth’s death.
Financial markets see an 80% chance the BoE will raise rates by 0.75 percentage points to 2.5% on September 22. This would be its biggest rise since 1989, barring a brief attempt to shore up sterling during a 1992 exchange rate crisis.
Most economists polled by Reuters believe a half-point increase is more likely, but also expect the BoE to continue raising rates next year, despite a slowdown in the recession-risk economy.
The UK has been hit hard by rising European natural gas prices caused by Russia’s invasion of Ukraine, which has added to post-Covid supply chain bottlenecks and shortages of labor, creating intense pressure on living standards.
British inflation is the highest among the G7 group of large advanced economies, although below that of several European countries, such as Spain and the Netherlands.
UK inflation rate highest in G7 but lower than some EU countries
GEARED INFLATION?
The BoE’s task of returning inflation to its 2% target has been made slightly easier, at least in the short term, by new Prime Minister Liz Truss’ decision to cap household energy prices, which will rise by 25% instead of 80% in October.
A view of fuel pumps at a BP gas station in central London, Britain, August 2, 2022. REUTERS/Henry Nicholls
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Before the cap, economists had forecast inflation could top 15% early next year.
The government is expected to use public borrowing to compensate energy companies for lower prices, likely to cost around 100 billion pounds ($116 billion), and has promised other support and tax cuts.
Economists say this extra stimulus for an economy that is nearing capacity, with unemployment at its lowest since 1974, will keep domestic inflationary pressures at bay and require the BoE to raise rates further to bring inflation back up. to its 2% target.
“While these fiscal interventions will ease short-term pain for consumers and lower the headline rate of inflation, they mean the risks to our medium-term inflation calls are to the upside,” said Kallum Pickering, senior economist at Berenberg Bank.
Financial markets expect BoE rates to peak around 4.5% by the middle of next year.
There were mixed messages about the future path of inflation in Wednesday’s numbers. The CPI rose 0.5% in August from July on a non-seasonally adjusted basis, below economists’ forecasts of 0.6% and less than the previous month.
Prices for motor fuels and lubricants fell 6.8% in August, their biggest monthly drop since April 2020, and producer price data showed lower pressure in the channeling
Costs to manufacturers of raw materials and energy fell 1.2% in monthly terms in August, the first drop in two years due to lower crude oil prices. Factory selling prices also declined slightly during the month.
However, the core CPI – which excludes food, energy, alcohol and tobacco prices and which some economists believe gives a better direction of medium-term price trends – rose to 6.3% annually from 6.2%, its highest since 1992.
The BoE is also keeping a close eye on surveys of public and business expectations for future inflation, which have reached record highs, as well as wages, which are rising faster than the BoE is comfortable with, although much less than inflation Read more
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Reporting by David Milliken; edited by Toby Chopra
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