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Britain’s high inflation rate unexpectedly fell in August, official data showed on Wednesday, raising questions about how much higher the Bank of England will take interest rates a day before its next policy announcement.
The consumer price index dropped to 6.7% from July’s 6.8%, confounding forecasts by economists polled by Reuters – and the BoE – for an increase.
The surprise drop in the inflation rate to its lowest since February 2022 pushed sterling to its lowest against the U.S. dollar since May. The pound also fell against the euro as investors scaled back bets on future rate hikes by the BoE.
The Office for National Statistics said the fall was driven by a drop in hotel prices and air fares, which are often volatile, and by food prices rising by less than at the same time last year.
That offset a jump in fuel prices and an increase in a tax on alcoholic drinks.
The BoE said last month that it expected inflation in August would rise to 7.1% before falling sharply to around 5% in October which would still be more than double its 2% target.
Investors had expected the BoE to raise interest rates for the 15th time in a row on Thursday, taking Bank Rate to 5.5% from 5.25%.
That looked much less certain in light of the inflation data. Investors put a roughly 45% chance on the BoE pausing its run of rate hikes on Thursday, up from about 20% before the inflation figures were published.
Core inflation – which strips out volatile food and energy prices – fell by more than the headline rate to 6.2% from 6.9% in July. The Reuters poll had pointed to a reading of 6.8% in August.
Price growth in Britain’s service sector, which is also being closed watched by the BoE, also lost some of its steam as it slowed to 6.8% from 7.4% in July.
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As well as providing some relief to the BoE, which has come under criticism after inflation surpassed 11% last October, the latest figures were welcomed by the government of Prime Minister Rishi Sunak. He has promised to halve inflation this year before an election expected in 2024.
“Today’s news shows the plan to deal with inflation is working – plain and simple,” finance minister Jeremy Hunt said.
“But it 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. It is also the only path to sustainably higher growth.”
First published on: 20-09-2023 at 12:31 IST
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