A customer browses fruit and vegetables for sale at an indoor market in Sheffield, United Kingdom. The OECD recently predicted that Britain will experience the highest inflation of any advanced economy this year.
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British inflation surprised with a dip to 6.7% in August, below expectations and raising expectations for a pause in Bank of England rate hikes on Thursday.
On a monthly basis, the overall consumer price index (CPI) increased by 0.3%.
Economists polled by Reuters expected the headline figure to reach 7% annually and rise 0.7% month-on-month, amid a slight increase in prices at the pump. In July there was an annual increase of 6.8% and a decrease of 0.4% on a monthly basis.
“The largest downward contributions to the monthly change in both the CPIH and CPI annual figures came from food, where prices rose less in August 2023 than a year ago, and from accommodation services, where prices can be volatile and in August 2023 fell,” the newspaper said. The Office for National Statistics said this.
“Rising motor fuel prices have led to the largest upward contribution to the change in annual rates.”
The core CPI – which excludes volatile food, energy, alcohol and tobacco prices – stood at 6.2% in the 12 months to the end of August, up from 6.9% in July. The goods price rose slightly from 6.1% to 6.3%, but was more than offset by the significant slowdown in the service rate from 7.4% to 6.8%.
Raoul Ruparel, director of Boston Consulting Groups’ Center for Growth, said this unexpected drop in core inflation would be particularly welcomed by policymakers, along with signs that retail prices for consumers are starting to fall.
“This, combined with nominal wage growth, suggests that real wages will continue to rise towards the end of the year. Overall, this will be a relief for households, but it is also a sign that the economy appears to be slowing.” Ruparel said in an email on Wednesday.
“We believe the Bank of England will still raise rates tomorrow, but today’s figures will embolden those pushing for this as the last rate hike. However, it also highlights the challenge for the Bank of England as the economy now shows signs of cooling and the full impact of the rate hikes is not being felt.”
The Bank of England will announce its next monetary policy decision on Thursday, as policymakers continue their efforts to push inflation back towards the Bank’s 2% target.
The market has roughly priced in another rate hike of 25 basis points, which would take the key bank rate to 5.5% – the highest level since December 2007.
In light of Wednesday’s downward inflation surprise, the market price for a Bank of England break rose from 20% to almost 50% around 7:40 a.m. London time.
Caroline Simmons, UK Chief Investment Officer at UBS, told CNBC that the central bank will most likely still hike on Thursday.
“However, we believe this will be their last increase as we do face downward forces on inflation,” she added.
“I think the recent rise in oil prices has made people nervous that oil prices wouldn’t continue to fall this morning. Therefore, people had more upside risk to their numbers, but I think the overall trend is down.”