U.K. Inflation Rate Slips From 40-Year High With Drop In Petrol Prices
The UK's inflation rate, measured by the consumer prices index, rose 9.9% from a year ago in August from 10.1% in July. Economists had expecting a reading of 10%.
(Bloomberg) -- Britain’s inflation eased from its highest rate in four decades after petrol declined, leaving the pace of price increases uncomfortably high for the Bank of England.
The Consumer Prices Index rose 9.9% from a year ago last month, slower than the 10.1% pace in July, the Office for National Statistics said Wednesday. Economists expected a reading of 10%.
The reading may fan speculation that inflation will soon peak, relieving some of the pressure on the central bank to act. Prime Minister Liz Truss announced plans to freeze an increase in energy bills due to hit in October, a move economists say will reduce the severity of a further spike in prices this winter. Even with those measures, inflation will remain above the BOE’s 2% goal well into next year.
“The Bank of England continues to face a tough challenge to bring price growth back towards its target level,” said Rachel Winter, Partner at Killik & Co. “Policymakers have already hinted that they intend to deliver another increase in the base rate next week, given the ongoing underlying pressures.”
UK bonds rose, cutting the yield on 10-year notes 5 basis points to 3.12%.
What Bloomberg Economics Says ...
“UK CPI inflation eased slightly in August, reflecting a monthly drop in fuel prices. Still, with inflation running nearly five times above target and pressures broadening further, that won’t stop the Bank of England from delivering another outsized hike at its Sept. 22 policy meeting -- our base case is for a 50-basis point move. That’s because we think the government’s emergency energy support package reduces the need for front-loading by ensuring a lower inflation peak and a faster decline next year.”
--Ana Luis Andrade, Bloomberg Economics. Click for the REACT.
The lower than expected figure in the UK is in stark contrast to Tuesday’s report in the US, which showed inflation remains hotter than most were predicting. That reading triggered rout in stocks as traders became more certain the Federal Reserve will raise interest rates three-quarters of a percentage point next week.
The BOE holds its own meeting on Sept. 22, when investors are currently torn between anticipating either a 50 or 75 basis-point hike from the current 1.75%.
“Today’s news is unlikely to alter expectations of a rise in interest rates when the Bank of England meets next week,” said Kitty Ussher, chief economist for the Institute of Directors. “It is home-grown inflationary pressures such as these that are the main concern.”
UK economists had anticipated a small decline in the inflation rate last month, reflecting a 6.8% drop in the cost of petrol instead of the 1.3% increase recorded a year ago. Food prices rose 1.5% and clothing climbed 1.1%, putting upward pressure on inflation.
Bloomberg Economics expects inflation to peak at 10.5% in October, well below the more than 13% forecast by the BOE in August before Truss made her announcement. Most forecasters including the BOE expect a rapid retreat in price growth next year, assuming the cost of natural gas and electricity doesn’t keep rising.
Core consumer prices, stripping out volatile alcohol, tobacco and fuel prices, accelerated to 6.3% in August from 6.2% the month before, a pace that economists expected would remain unchanged.
Producer input and output prices both fell unexpectedly for the first time since 2020, suggesting an easing of pipeline inflation pressures. Fuel and raw materials costs declined 1.2%, driven by cheaper crude oil. Factories cut their prices by 0.1%. Prices were still up sharply from a year earlier, however.
The cost of raw materials bought by producers fell 1.2% in August after little change in July.
Those prices remain too strong for many businesses, which are squeezed between rising labor and raw materials costs and a weakening economy.
“There is a limit to how long any firm can sustain these rising costs before something has to give. We know from our research that two thirds of businesses plan to increase their own prices,” said Alex Veitch, director of policy at the British Chambers of Commerce.
(Updates with market reaction.)
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