UK inflation drops slightly to 9.9% after fall in fuel costs

The Bank of England still expects the British economy to enter recession before the end of the year

A customer browses items on a market stall selling hair accessories in Barking, UK, as data shows inflation fell slightly in August. Bloomberg
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The UK's annual rate of consumer price inflation eased back to 9.9 per cent in August, down from a 40-year high of 10.1 per cent in July, the Office for National Statistics said on Wednesday.

Downward pressure from the cost of motor fuel was the main reason for the fall in the annual rate of inflation, the ONS said. Despite the fall, the pace of price increases is still uncomfortably high.

Wednesday's data slightly eases the pressure on the Bank of England, which is battling the highest inflation of any major advanced economy. Economists had expected the rate to remain largely flat. The pound erased earlier gains against the dollar after the release, trading at $1.1495 shortly after 7am UK time (10am UAE).

The reading may fan speculation that inflation has already peaked, relieving some of the pressure on the central bank to act. Prime Minister Liz Truss announced plans to freeze an increase in energy bills last week, a move economists say will prevent a further surge in prices this winter but keep inflation strong 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 retail investment company Killik & Co. “Policymakers have already hinted that they intend to deliver another increase in the base rate next week, given the ongoing underlying pressures.”

The 6.8 per cent drop in fuel prices was the highest since between March and April 2020, the early days of the pandemic, when oil prices briefly went negative on some markets.

“The easing in the annual inflation rate in August 2022 reflected principally a fall in the price of motor fuels in the transport part of the index,” the ONS said.

“Smaller, partially offsetting, upward effects came from price rises for food and non-alcoholic beverages, miscellaneous goods and services, and clothing and footwear.”

"The new measures announced by the government to cap energy prices for households ... could see inflation peak at a more modest 10.5 per cent in October," said KPMG UK chief economist Yael Selfin.

"However, with inflation in near double digits, the combination of expected tax cuts and support measures for households may prompt the Bank of England to take a more hawkish stance to avoid higher inflation further down the line."

The Bank of England has forecast an inflation-induced UK recession starting this year, and had predicted a peak of 13 per cent.

The August rate is still almost five times the Bank of England's target level of 2 per cent.

Earlier this week, official figures showed the UK's recession-threatened economy rebounded in July, but by less than expected after a hefty fall the previous month. British gross domestic product grew 0.2 per cent after contracting by 0.6 per cent in June. Economists had expected 0.3 per cent growth.

The Bank of England expects the UK economy to enter recession before the end of the year, amid decades-high inflation fuelled by high energy and food bills.

On Tuesday, Britain's unemployment fell to its lowest level since 1974 at 3.6 per cent in the three months to July. However, wages fell further behind spiralling inflation. The number of people on payrolls for August increased by 71,000 on July figures to a record 29.7 million, the ONS said.

The economic inactivity rate — measuring the share of the population who are not in work and not looking for work — increased by 0.4 percentage points on the quarter to 21.7 per cent. This was led by those classified as long-term sick and students.

The lower-than-expected figure in the UK is a stark contrast to Tuesday’s report in the US, which showed inflation is hotter than most were predicting. That reading triggered a rout in stocks as traders became more certain the Federal Reserve will raise interest rates by three quarters of a percentage point next week.

The Bank of England will hold its own meeting next week, after postponing this week's rate decision after the death of Queen Elizabeth II. Investors are torn between anticipating either a 50 or 75 basis-point rise from the current 1.75 per cent.

Interest rate futures show a 79 per cent chance that the Bank of England will raise rates by 75 basis points to 2.5 per cent on September 22. This would be its biggest rate rise since 1989, excluding a brief attempt to bolster sterling during a 1992 exchange-rate crisis.

The British Chambers of Commerce criticised a lack of detail from the government over the plan to cap energy costs.

"There is a limit to how long any firm can sustain these rising costs before something has to give," said Alex Veitch, director of policy at the British Chambers of Commerce. "We know from our research that two thirds of businesses plan to increase their own prices.

“The size of last week’s government intervention on energy prices should have a dampening effect on inflation when it is enacted.

“But the lack of detail on exactly how much help any individual business will get, and for how long, means very few will be planning to invest any time soon.

“There are also a whole host of other issues ranging from transport and shipping costs, raw material prices, energy sector regulation and the tight labour market, that must be addressed."

The Institute for Public Policy Research think tank said further government intervention was needed to prevent “more poverty and more destitution” as a result of rising prices.

"Many people will welcome CPI inflation easing slightly this month, falling from 10.1 per cent to 9.9 per cent, including the Bank of England, who are deciding whether to raise interest rates next week," Dr George Dibb from the centre-left institute said.

“However, this headline figure has been pulled down by falling petrol prices, and it hides worrying news that the prices of food and clothing are continuing to accelerate upwards.

“High inflation means high prices, and without intervention this will lead to more hardship, more poverty and more destitution."

Updated: September 14, 2022, 7:57 AM