UK inflation unexpectedly falls to 9.9% as fuel prices fall

LONDON – Inflation in Britain eased in August on the back of a fall in fuel prices, although food prices continued to rise as the country̵[ads1]7;s cost of living crisis persists.

The consumer price index rose 9.9% annually, according to estimates published on Wednesday by the Office for National Statistics, fractionally below a consensus forecast of 10.2% among economists polled by Reuters. It was also down from July’s figure of 10.1%.

Month-on-month, consumer prices rose 0.5%, a fraction below forecasts. Core inflation, which excludes volatile energy, food, alcohol and tobacco, was up 0.8% month-on-month and 6.3% year-on-year, in line with expectations.

“A fall in the price of motor fuel made the largest downward contribution to the change in both CPIH and CPI annual inflation rates between July and August 2022,” the ONS said in its report.

“Rising food prices made the largest, partially offsetting, upward contribution to the change in prices.”

Sterling was roughly flat against the dollar on Wednesday morning, trading at around $1.1490.

Britain has been hit by a historic cost of living crisis this year as food and energy prices skyrocket and wage rises fail to keep pace with inflation, leading to one of the sharpest falls in real wages on record.

Last week, new British Prime Minister Liz Truss announced a fiscal emergency package that caps annual household energy bills at £2,500 ($2,881.90) for the next two years, with a similar guarantee for businesses over the next six months and further support in the pipeline for vulnerable sectors.

Analysts expect the measures – estimated to cost the exchequer around £130 billion – to sharply reduce inflation prospects in the short term but increase them in the medium term.

The Bank of England is set to announce its latest monetary policy decision next Thursday after a delay due to the death of Queen Elizabeth II, and is widely expected to opt for a sharp 75 basis point rate hike as it looks to tame inflation.

At its last meeting, the bank forecast inflation would peak at 13.3% before the end of the year, and policymakers will reassess their outlook in light of Truss’s new energy cap announcement.

“Hopefully, the cap on energy bills could mean that inflation is now close to peaking, although last month’s fall is likely to be a fluke and we could see inflation rise further in the coming months,” said Richard Carter, head of fixed rates. research at Quilter Cheviot.

“While the energy plan may help, it comes at the cost of higher borrowing and government spending which could encourage the Bank of England to raise interest rates even further than originally expected.”