Please see the below update from Evelyn Partners sharing their thoughts on this morning’s UK inflation announcement for August:
What happened?
UK August annual headline CPI inflation was reported at 6.7% (Bloomberg consensus: 7.0%), versus 6.8% in July. In monthly terms, CPI was 0.3% (consensus: +0.7%), compared to a fall of -0.4% in July.
What does it mean?
The broad downward trend in inflation is still intact. Back in October last year, annual headline CPI inflation had reached 11.1%, but it has since fallen by over 4% points since then. Much of that deceleration has come from lower energy prices in the transport (i.e. fuel) and housing and household services (i.e gas and electricity) categories.
However, it could be argued that the decline seen in energy prices are in the rear-view mirror. Looking forward, the risk of another leg up in inflation from energy prices has increased a little following the August decision by the Saudis and Russians to implement new crude oil supply cuts into year end. This tightening in supply, along with solid economic growth in the US driving demand, has been behind the 30%-plus surge in Brent crude oil prices since June. UK petrol prices at the pump are edging up to reflect higher crude oil prices. The good news for households is that wholesale natural gas prices have barely budged: though peak winter demand has yet to come. For the moment, there is no evidence of a sharp acceleration in natural gas (or electricity) prices that could impact future inflation data.
Another lingering source of inflation comes from rents within the services category, which has yet to peak. Landlords are probably using a tight labour market lifting wages, higher mortgage rates and increased demand from record net immigration as an opportunity to raise rents.
Nevertheless, surveys of inflation expectations have come down from peaks. The YouGov household survey of one-year UK inflation expectations is currently 4.4%, compared to a peak of 6.3% in August 2022. This suggest that the risk of inflation becoming entrenched in the economy is contained and should reduce pressure on the Bank of England to raise interest rates significantly from here. As it stands, money markets have priced one more 0.25 percentage point rate hike when the BoE’s Monetary Policy Committee next meets on 21 September, and then a pause from there.
Bottom Line
Despite pockets of inflationary pressures (i.e rents), the broad deceleration trend in inflation is intact and this increases the likelihood that the BoE is close to the end of its interest rate-hiking cycle.
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Andrew Lloyd DipPFS
20th September 2023