A shopper explores a wide selection of fresh produce at an indoor market in Sheffield, UK. In a recent report, the OECD projected that the UK will see the highest inflation rate among all advanced economies this year.
Bloomberg | Bloomberg | Getty Images
In August, UK inflation unexpectedly dropped to 6.7%, which was below market expectations. This development has increased speculation that the Bank of England will pause its interest rate hikes on Thursday.
On a monthly basis, the consumer price index (CPI) rose by 0.3%.
Economists surveyed by Reuters had forecasted an annual CPI figure of 7%, with a monthly increase of 0.7%, due to a slight rise in fuel prices. In comparison, July’s figures showed a 6.8% yearly increase and a 0.4% monthly decline.
According to the Office for National Statistics, “The largest contributors to the decrease in both CPIH and CPI annual rates were food prices, which rose less in August 2023 compared to the previous year, and accommodation services, which experienced volatility and declined in August 2023.”
“The increase in prices for motor fuel had the biggest impact on the change in annual rates.”
The core CPI, which excludes volatile prices of food, energy, alcohol, and tobacco, dropped to 6.2% in the 12 months leading up to August, down from July’s 6.9%. The goods rate slightly increased from 6.1% to 6.3%, but this was offset by a significant slowdown in the services rate, which fell from 7.4% to 6.8%.
Raoul Ruparel, director of the Centre for Growth at Boston Consulting Group, noted that policymakers would welcome this unexpected decrease in core inflation, as well as indications that retail prices are starting to ease for consumers.
“This, coupled with nominal wage growth, suggests that real wages will continue to rise towards the end of the year. It’s a relief for households, but it also signals a slowdown in the economy,” Ruparel stated in an email on Wednesday.
“We believe the Bank of England will still raise rates tomorrow, but today’s data will reinforce those who argue that this should be the final rate hike. However, it also highlights the challenge for the Bank of England, as the economy shows signs of cooling and the full impact of previous rate hikes is yet to be felt.”
The Bank of England will announce its next monetary policy decision on Thursday as it continues its efforts to bring inflation back down to the Bank’s 2% target.
The market has largely factored in another 25 basis-point increase in interest rates, which would bring the main bank rate to 5.5% — the highest level since December 2007.
Given Wednesday’s surprise drop in inflation, the market is now assigning a nearly 50% probability of the Bank of England pausing its rate hikes at around 7:40 a.m. London time.
Caroline Simmons, U.K. chief investment officer at UBS, told CNBC that the central bank will most likely proceed with a rate hike on Thursday.
“However, we do believe that this will be their last hike, as there are downward pressures on inflation,” she added.
“The recent increase in oil prices made people nervous that this morning’s inflation figure might not continue to decline, which is why some had higher expectations. Overall, the trend is downward.”
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