- Unexpected Drop in Inflation Lowers Cost of Living
- Mixed Picture for Food Prices Despite Global Increases
- Implications for Interest Rates and Government Inflation Goals
The cost of living is now at its lowest level in over a year and a half as a result of the unexpected drop in inflation in August.
Inflation, which measures how prices change over time, decreased from 6.8% in July to 6.7% in August, according to official data.
This is the third consecutive month that the number has decreased.
Milk, cheese, and egg price increases slowed the most, while fish and vegetable price increases also slowed.
Additionally, hotel and airfare costs decreased, while fuel prices rose.
When the rate of inflation declines, it does not indicate that prices are falling, but rather that they are increasing less rapidly.
As a result of rising petroleum prices, many economists had anticipated an increase in August’s figure.
The news, according to Chancellor Jeremy Hunt, demonstrates that “the plan to combat inflation is working.”
“However, it is still too high, which makes it all the more vital that we adhere to our plan to cut it in half so that we can reduce the burden on families and businesses. Additionally, it is the only way to sustainably increase growth.”
Following Russia’s invasion of Ukraine, food prices increased globally, which was one of the factors driving up prices at supermarket checkouts.
Major exporters of goods such as sunflower oil, wheat, and fertilizer, the two countries were affected by the conflict.
In recent months, however, the rate of food inflation, while still very high and in double digits, has slowed.
The Office of National Statistics (ONS) reports that annual price increases for food and non-alcoholic beverages slowed to 13.6% in August, down from 14.9% in July.
Grant Fitzner, chief economist at the ONS, stated that it remained a “mixed picture,” with some commodities, such as bread and cereals, continuing to increase in price while others decrease.
In the past month, fish, oils lipids, and vegetables have decreased in price, he said.
“Food manufacturers are paying less for food than they did a year ago,” he added, and “consumers are beginning to feel the effects.”
The decline could be good news for consumers whose purchasing and dining expenses have soared.
Nick Collins is the CEO of Lounges PLC, a company that operates cafes, bars, restaurants, and roadside diners. He said that increasing food costs had compelled him to increase prices by 8% over the past year.
“In normal years, we would increase our prices by between 1.5 and 2 percent,” he explained.
Mr. Collins stated that he had observed “absolutely no change in customer behavior” and that individuals were not “tightening their belts.”
“If they were, you would observe fewer individuals at the beginning of the week. You would spend less as payday approaches… We’ve seen none of that.”
What are the implications for interest rates?
Since December 2021, the Bank of England has raised interest rates fourteen times in succession to curb price inflation.
These latest figures, however, raise doubts as to whether the Bank will raise rates again at its meeting on Thursday.
While inflation at 6.7% remains elevated and well above target, it has declined for three consecutive months.
Overall, this will provide some support to rate-setting officials on the Bank’s Monetary Policy Committee, who wish to limit future rate increases. It is still probable that the prime rate will increase from 5.25 percent to 5.50 percent tomorrow, but that may be the last increase.
The most recent inflation data also indicates that the government is more likely to achieve its goal of halving inflation this year.
The chancellor told reporters on Wednesday, “Independent forecasters indicate that we are on track to meet the prime minister’s goal, so let’s see what transpires.”
However, the United Kingdom’s inflation rate remains stubbornly elevated compared to other wealthy nations.
Tuesday, the Organisation for Economic Co-operation and Development released a new forecast indicating that prices will rise quicker in the United Kingdom than in any other advanced economy this year.
