Inflation in the UK dropped for the first time in nearly a year, but will do little to stop the Bank of England from continuing to hike interest rates, City economists said today.
Prices climbed 9.9 per cent over the year to August, down from a 40-year high rate of 10.1 in July, according to the Office for National Statistics (ONS).
The rate was lower than analysts’ expectations of 10.2 per cent and was the first time annual inflation has dropped since September last year.
Tumbling petrol prices caused by international oil markets cooling after being bounced by Russia sucking supplies out of the market and an uptick in global demand caused by countries emerging from Covid-19 restrictions led UK inflation lower.
Inflation is still hovering around a four decade high.
Experts warned underlying price pressures are still seeping into the UK economy.
Core inflation – seen as a more accurate measure of inflation dynamics in a country – edged higher to 6.3 per cent. Prices for services climbed to a 30-year high of 5.9 per cent.
The “news is unlikely to alter expectations of a rise in interest rates when the Bank of England meets next week,” Kitty Ussher, chief economist at the Institute of Directors, said, adding the central bank is fretting over “home-grown inflationary pressures”.
James Smith, developed markets economist at Dutch bank ING, said the Bank is also concerned about rising wages.
“Worker shortages that have plagued the jobs market for several months now don’t appear to be resolving themselves very quickly. The BoE’s hawks are concerned that this will translate into persistent pressure on wage growth,” he said.
Governor Andrew Bailey and the rest of the monetary policy committee (MPC) are expected to raise interest rates at least 50 basis points next Thursday. That would be the second such move in a row.
Markets are pricing in a slim chance of a 75 basis point rise, which would be the biggest in the Bank’s 25 years of independence.
Prime minister Liz Truss’s £150bn cost of living support package in which she froze household energy bills for two years at £2,500 will reduce what could have been a more than 22 per cent inflation summit.
Economists now expect inflation to peak at around 11 per cent in October.
Before the measures were announced last Thursday, Britain was hurtling toward a 15-month long recession, beginning in the final months of this year.
The extra government spending will reduce the severity of the slump, but the UK is still likely to tip into a technical recession, possibly as soon as this quarter due to the lost working day for The Queen’s funeral.
The FTSE 100 fell 0.69 per cent, while the pound strengthened 0.42 per cent against the US dollar.