An unexpected drop in inflation represents some welcome news for consumers, as well as for Bank of England Governor Andrew Bailey and Prime Minister Rishi Sunak, who is still (just) on track to deliver on his promise to halve the rate of inflation from January’s 10.7 percent by the end of the year.
A 6.7 percent increase in the Consumer Prices Index is still more than three times the Bank of England’s target, higher than Mr Sunak’s self-imposed goal of 5.3 percent and means the cost-of-living is still rising uncomfortably quickly for many.
The good news is wage growth, on average, now exceeds inflation and that figure was lower than economists had been expecting.
The effect of higher prices for motor fuel, the cost of household services and alcohol and tobacco was offset in August by a deceleration in growth in prices for food, furniture and restaurants and hotels – hence the deceleration in the headline inflation rate.
The Bank of England will be particularly pleased to see the rate of services inflation cool from 7.4 percent to 6.8 percent.
That may take some of the sting out of wage demands, too, and ease the central bank’s fears of a 1970s-style spiral of higher prices, higher wages, higher prices and higher wages.
While the easing in the rate of inflation was a surprise, traders and investors have quickly latched on to the news and interpreted it to mean that we are very close to a peak in the Bank of England base rate.
Summer’s fears of a possible 6.50 percent base rate by Christmas have given way to hopes that we may get one more hike to 5.50 percent either today or in November – and then that will be it.
One week ago, markets felt that another one-quarter percentage point increase in the base rate at today’s Monetary Policy Committee meeting was very likely.
Now they are sitting on the fence, thinking it is 50-50. In response, the FTSE 100 and FTSE 250 are higher – with housebuilders, banks and builders’ merchants leading the way.
The Pound is lower and UK Government gilt yields are lower. In each case, the markets are anticipating not just a peak in interest rates in 2023, but a first cut in headline borrowing costs at some stage in 2024.
And that would be very welcome news for householders and anyone with a mortgage, car loan or credit card balance.