United Kingdom: Inflation decreases in August but remains elevated
Inflation dropped to 9.9% in August from July’s 10.1%. The reading was driven by moderating price pressures for transport; recreation and culture; and restaurants and hotels.
Annual average inflation rose to 7.0% in August (July: 6.5%). Meanwhile, core inflation rose to 6.3% from July’s 6.2%.
Finally, consumer prices increased 0.50% over the previous month in August, a smaller increase than the 0.61% rise recorded in July. August’s result marked the weakest reading since January.
Looking ahead, Prime Minister Liz Truss’ recent announcement that energy bills will be frozen for both firms and households should cause headline inflation to peak at slightly over 10% in Q4, lower than previously expected. For households, energy bills which were due to rise to around GBP 3,500 from October will now be capped at GBP 2,500 for two years. However, the measures are likely to stoke demand and thus boost price pressures in other areas of the economy.
On Truss’ announcement, analysts at Goldman Sachs said:
We now look for headline inflation to peak at 10.9% in October, significantly lower and earlier than our previous peak of 14.8% in January. […] The rapid deceleration out of double-digit inflation under the energy bill freeze is likely to guard against risks of inflation expectations de-anchoring.[…] At the same time, we expect the expansionary nature of the fiscal intervention to result in higher core inflation and wage growth.”