UK inflation rate ease but still near 40y high

The UK inflation rate has eased slightly although prices are still continuing to rise at nearly their fastest rate in 40 years.

Inflation – a measure of price rises – dipped to 9.9% in the 12 months to August, from 10.1% in July, the Office for National Statistics (ONS) said.

Soaring living costs are eating into household budgets, with prices rising faster than wages.

The Bank of England has said inflation could peak at more than 13% this year.

Falling petrol prices were the main reason the pace of inflation eased.

Petrol prices fell by 14.3p per litre between July and August, while diesel prices also dipped.

Fuel prices have been surging, driven by the war in Ukraine, and moves to reduce Europe’s dependence on Russian oil.

But wholesale costs fell after fears of a recession in the US hit demand for oil.

However, food prices continued to soar in August, partially offsetting the fall in fuel prices.

Food and soft drink prices rose by 1.5% over the month, the largest July to August rise since 1995.

The rise in global food prices following Russia’s invasion of Ukraine has been one of the factors pushing up prices at supermarket tills.

The war has disrupted supplies from the two countries, which are major exporters of goods such as sunflower oil, wheat, and fertiliser.

The easing in the inflation rate reflects some respite at the petrol pumps over summer.

The real question is whether we are now past the peak?

That would have been a ridiculous suggestion a week ago before the Energy Price Guarantee.

But that should take 4 to 6 percentage points off headline inflation in the coming months.

The problem is that other sources of inflation are still surging.

Food prices rose over the month of August, by the highest rate since 1995, driven by basics such as milk, cheese and eggs.

Services inflation, which captures rising wages in large parts of the economy, is still going up too.

And, of course, even at 9.9%, prices are rising much faster than wages, and much higher than the Bank of England’s 2% target.

The Bank is still likely to raise interest rates repeatedly in the coming months.

So the expectation is that this is a dip, before further rises alongside the increase in energy bills next month.

However, the peak, when it comes, should be much closer to where we are now, perhaps 11 or 12%, than anticipated before the Prime Minister’s energy guarantee.

Inflation is the pace at which prices are rising. For example, if a bottle of milk costs £1 and that rises by 5p compared with a year earlier, then milk inflation is 5%.

Central banks around the world, including the Bank of England, have been trying to get soaring inflation under control by hiking interest rates.

The Bank had been widely expected to increase rates again on Thursday, but it postponed that decision following the death of Queen Elizabeth II.

The Monetary Policy Committee’s decision will now be announced on 22 September.

Economists say the Bank is still likely to raise rates, despite this slight easing in the inflation rate.

“This is the first time that the inflation rate has fallen since September last year, and will be reassuring to businesses,” said Kitty Ussher, chief economist at the Institute of Directors.

But she warned that the easing inflation rate is due to changes in the price of petrol and diesel, which is driven predominantly by the international price of oil rather than by domestic factors.

“[This] means today’s news is unlikely to alter expectations of a rise in interest rates when the Bank of England meets next week,” she said.

The rate of price rises for UK products and services such as dairy and personal care items continued to go up in August, she said.

“It is home-grown inflationary pressures such as these that are the main concern of the Bank of England,” Ms Ussher added.

Writes /BBC/

Reports /TrainViral/