Overview

In August, U.K. inflation unexpectedly dropped to 6.7%, falling below expectations. This has led to increased speculation that the Bank of England will pause its interest rate hikes.

Key Figures

• The headline consumer price index (CPI) rose by 0.3% on a monthly basis.
• Economists predicted an annual headline figure of 7% and a monthly increase of 0.7%. However, the actual numbers were lower.
• The Office for National Statistics attributed the decrease in annual rates to lower food prices and volatile accommodation services.
• The core CPI, which excludes volatile items, decreased to 6.2% in the 12 months ending in August.

Expert Analysis

Raoul Ruparel, director of Boston Consulting Groups’ Centre for Growth, welcomed the fall in core inflation and highlighted signs of easing retail prices. He believes this will lead to an increase in real wages and provide relief to households. However, Ruparel also noted that the economy is showing signs of slowing.

Caroline Simmons, U.K. chief investment officer at UBS, stated that despite the unexpected drop in inflation, the Bank of England is still likely to raise rates. She believes this will be the last hike due to downward pressures on inflation.

Bank of England Decision

The Bank of England is set to announce its next monetary policy decision on Thursday. The market has already factored in a 25-basis-point hike, which would bring the main bank rate to 5.5% – its highest level since December 2007. However, following the surprise inflation figures, market expectations for a pause from the Bank of England have increased to almost 50%.