Too early to say UK inflation has peaked despite unexpected dip

(Alliance News) - The annual UK inflation rate, surprisingly, eased back into single-digits in August, the Office for National Statistics said on Wednesday, but analyst warned it was "way too early" to say inflation has peaked.

Danni Hewson, analyst at AJ Bell, nonetheless said the the dip below double figures was "psychologically important for households getting ready for what they're expecting to be a difficult winter."

The consumer price index rose 9.9% year-on-year in August, unexpectedly slowing from 10.1% in July. Consensus, according to FXStreet, was for the rate reading to tick up to 10.2%.

July's figure had been the highest since current records began in 1997 and at a level, according to models, not seen since 1982. Inflation remains far higher than the Bank of England's 2% target.

A fall in the price of motor fuels made the largest downward contribution, while rising food prices were the largest upward contributor.

"There's no denying August's fall is good news for UK households and there's a real sense of expectation that the spectre of 20% inflation has been pushed firmly aside following the government's energy price freeze announcement," AJ Bell's Hewson said.

On Thursday, UK Prime Minister Liz Truss revealed energy bills for the average UK household will be frozen at no more than GBP2,500 per year, and businesses will be spared crippling increases.

Truss's two-year plan will be paid for by tens of billions of pounds of borrowing and is due to save the typical household around GBP1,000 from October and protect bill payers from further expected rises over the coming months.

For businesses and other non-domestic users such as schools and hospitals, which have not been covered by the existing price cap, a six-month scheme will offer equivalent support.

Despite the promised help, Hewson warned that "there is still a real possibility that there will be more bumps on the long road back to the two percent target."

Hewson explained, for example, that there is "mounting" concern that the promised help with energy costs for businesses might not be ready for roll out before November.

Russ Mould, investment director at AJ Bell, expressed similar concern: "There remains a lot of uncertainty over corporate profits. We've seen quite a few companies disappoint the market with downgraded earnings guidance, and if there is more bad news to come on this front then share prices will stay under pressure."

Susannah Streeter, senior investment analyst at Hargreaves Lansdown, was more optimistic on the latest data and its future implications: "The slight drop in UK inflation, the first in 11 months, will ease pressure on give policymakers and give them a bit more breathing space."

"The expectation is that the Bank of England won't now push down quite as hard on the monetary brake pedal as the Federal Reserve is forecast to do in terms of rate hikes after the US inflation snapshot came in higher than expected," Streeter continued.

US consumer price growth topped expectations in August. The annual inflation rate for August was 8.3%, beating forecast, according to FXStreet, of 8.1%, but still easing off July's rate of 8.5%.

The Fed will unveil its latest interest rate decision on Wednesday next week, with a 75 basis point rate hike now 90% priced in by markets, according to the CME's FedWatch tool.

The Bank of England reveal its own interest rate decision next Thursday.

Whilst the headline UK inflation figure fell in August, core inflation edged up as forecast. Danni Hewson suggested it was this figure that England's monetary policy would be "eyeing intently."

CMC Markets' Michael Hewson placed equal weight on the core inflation figure: "This [core inflation reading] would be more of a worry for the Bank of England and could force them to move by 75bps next week, with the potential for more to come by year end."

Craig Erlam, senior market analyst at Oanda, disagreed on the importance of the data to the central bank: "The data won't in all likelihood change the outcome of the BoE meeting next week, with 75 basis points now heavily backed but 50 also possible."

Consensus, as cited by FXStreet, is for a 50 basis point hike.

The interest rate decision will be made on Thursday 22 September at 1200 BST.

By Heather Rydings; [email protected]

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