U.K. Inflation Rate Slips Lower for Third Straight Month

The News

Inflation in Britain slowed for a third consecutive month in August, unexpectedly continuing its downward trend despite a jump in fuel prices.

Consumer prices rose 6.7 percent last month compared with a year earlier, slightly slower than the previous month, the Office for National Statistics said on Wednesday. Economists had expected inflation to rise following a global surge in energy prices. While higher prices at the pump added to inflationary pressures, they were offset by slower increases in the price of food and a monthly decline in the cost of hotel rooms.

Deeper Into the Numbers: Core inflation slowed faster than expected.

The volatility and international nature of energy prices means policymakers are also closely watching other measures of inflation to determine how embedded price growth has become in the economy.

A key gauge of domestic price pressures is core inflation, which strips out energy and food costs. Last month, the annual rate of core inflation fell to 6.2 percent, from 6.9 percent in July, a faster decline than economists predicted. It was driven by a slowdown in services inflation, another key measure because it reflects companies’ labor costs — wages tend to be a persistent force of inflation.

Why It Matters: The Government pledged to halve inflation.

As household budgets have been squeezed by high energy bills, grocery prices and other costs, Wednesday’s data will bring some confidence that inflation is abating. The headline rate of inflation has slowed meaningfully from its peak in October, when it climbed above 11 percent.

Britain’s prime minister, Rishi Sunak, pledged to halve inflation this year, a goal he is on track to meet. But price growth is still uncomfortably fast and the government has remained cautious. On Wednesday, Jeremy Hunt, Britain’s top finance official, said the government would “stick to our plan” to halve inflation “so we can ease the pressure on families and businesses.”

How Britain Compares: Higher energy prices reignite inflation pressures.

Even as progress has been made in reducing price pressures in many countries, central bankers have been wary of declaring victory too soon as inflation rates are still above their targets. Rising energy prices pushed up inflation in the United States last month and added to inflation pressures in other European countries.

But the headline rate of inflation in Britain is still much higher than in the United States, where prices rose 3.7 percent in August, and the eurozone, where price growth averaged 5.2 percent for the 20 countries that use the euro.

While some differences can be explained by how these countries respond to changes in wholesale energy prices, there are other signs that inflation is more persistent in Britain. Core inflation is also higher in Britain, as it faces faster-than-expected wage growth in the private sector because of a tight labor market.

What’s Next: Britain’s central bank will set interest rates on Thursday.

The Bank of England has raised interest rates to the highest level in 15 years in an effort to stamp out high inflation. Policymakers are trying to find a balance between tightening policy enough to return inflation to the central bank’s 2 percent target without pushing the economy into a recession.

The latest decision on interest rates will be announced on Thursday. For months, members of the rate-setting committee have been divided over whether to take more action to bring down inflation or if they were at risk of overdoing it and causing unnecessary damage.

Policymakers voting to increase rates have been in the majority, so far. But amid signs that inflation is slowing and the British economy is weak, there have been growing bets among investors that the central bank might hold off on raising interest rates this week.

Wednesday’s inflation data was lower than the central bank forecast last month, a positive surprise, that is likely to increase expectations that the bank will pause this week.

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