But prices are still rising at about the fastest pace in 40 years, and an increase in core inflation will keep the pressure on the central bank to raise interest rates.
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Annual change in Britain’s Consumer Prices Index
Source: Office for National Statistics
By The New York Times
Consumer prices in Britain rose 9.9 percent in August from a year earlier, a slight easing of the inflation rate and the first decline in nearly a year, signaling that inflation may have reached its peak, or be very near it.
While this sign of a turnaround in the trajectory of inflation is likely to bring some relief to lawmakers and policymakers, it will provide only limited comfort to consumers. With prices rising at the fastest pace in 40 years, households are still feeling the squeeze on their budgets, and the Bank of England will remain under pressure to raise interest rates.
The inflation rate fell from 10.1 percent in July, the Office for National Statistics said on Wednesday. A decline in the price of motor fuels, as well as smaller upward contributions from the price of food and clothing, pulled the rate down.
The inflation rate last declined last September, when the effects of the end of widespread discounting in restaurants the previous summer dropped out of the annual calculations of price changes.
Britain’s inflation rate had been expected to reach 13 percent in October, according to a forecast from the Bank of England last month, and then possibly rise again in January — each time jumping after a rise in the government’s price cap on household energy bills to reflect rising wholesale natural gas prices. But those predictions were made obsolete last week when the newly installed prime minister, Liz Truss, announced that she would freeze energy bills for the next two winters at an average of 2,500 pounds ($2,880) a year.
Ms. Truss said she expected the move to lower the expected inflation rate by as much as five percentage points.
Analysts, too, quickly slashed their forecasts.
Inflation will peak slightly higher in October, at nearly 11 percent, and then “looks set to drop sharply next year” because of the government’s new energy price cap, Samuel Tombs, an economist at Pantheon Macroeconomics, wrote in a note to clients on Wednesday.
Besides dampening inflation, the policy is expected to put more money in people’s pockets and lessen the severity of any upcoming recession.
But the policy runs the risk of making high inflation more persistent, even if the overall rate doesn’t go higher. The freeze in energy bills will allow households to set aside less money for gas and electricity, and they might spend it instead on restaurants and travel. This keeps up the pressure on the central bank to restrain the economy with interest rate increases in an effort to stamp out high inflation. The bank targets a 2 percent inflation rate.
Core inflation, a measure of price increases excluding volatile energy and food prices, was 6.3 percent in August, rising slightly from 6.2 percent in July.
What the Bank of England cares about, Huw Pill, the central bank’s chief economist, said last week, is the impact of fiscal policy changes over the medium term, as opposed to any short-term decrease in the main inflation rate.
Economists expect the bank to raise interest rates another half-percentage point, to 2.25 percent, when policymakers meet next week. The meeting was postponed by a week, until after the national mourning period for Queen Elizabeth II.
But the shallower outlook for medium-term inflation makes it less likely that policymakers will need to “strangle the economy” by raising interest rates as high as 4 percent, which traders recently anticipated, Mr. Tombs wrote.
The path of inflation in Britain has been heavily influenced by energy prices, particularly natural gas. But even when energy prices fall, the impact on inflation will linger. Over time, businesses and workers will continue to adjust their prices and demand higher wages to make up the lost profits and diminished purchasing power caused by higher inflation. This challenge, plus the effort to keep expectations about future inflation low, is why central banks have been raising rates in larger increments.
On Tuesday, data showed that inflation in the United States didn’t slow as much as economists expected. This keeps the pressure on the Federal Reserve to aggressively raise rates, and the S&P 500 index dropped more than 4 percent, its worst day since June 2020, in anticipation of the central bank’s moves.
For many British consumers, price increases are still painfully high. The price of food rose 13.1 percent in August from a year earlier, the fastest pace in 14 years, with the price of milk, cheese and eggs, especially, driving inflation higher.
Ocado, an online grocery company, said on Tuesday that its customers were buying less and looking for “value-for-money items” in response to inflationary pressures. Its food prices have increased 7 percent over the past year.
Wages aren’t keeping up with these high prices. Pay, excluding bonuses and adjusted for inflation, fell 2.8 percent in the three months to July compared with a year earlier, one of the largest drops since comparable records began two decades ago.
Across the country, workers in several industries have gone on strike to demand pay raises more in line with the rising cost of living. Another eight-day walkout is set to begin at the Felixstowe port, Britain’s largest container ship dock, later this month, overlapping with strikers at Liverpool’s port.