UK inflation falls for the first time in a year

Falling gasoline prices pushed the British inflation rate below 10% in August, in the first easing of upward pressure on the cost of living in nearly a year. 

UK inflation falls

Experts say this first drop could mean that inflation in the UK may have peaked and thus begin its descent, even though in the US the inflation rate, after a slight halt in July, ticked up unexpectedly again in August, prompting a slump in US markets, which fear renewed Fed intervention on rates to keep inflation at bay.

However, the slight drop in inflation in August from the 10.1% marked in July is only a very slight relief for consumers, who have to deal with the highest inflation rate in 40 years. And that is why the Bank of England is likely to decide on a 0.5% rate hike when it meets next week, raising rates to 2.25%.

Inflation in Britain still remains at a much higher rate, about three times higher than the 3.2% recorded in August 2021 and nearly five times higher than the official target of 2%. In contrast, core inflation, which excludes fuel, food, alcohol and tobacco rose from 6.2% to 6.3% last month.

The last slight decline in inflation had occurred exactly one year ago, in September 2021, due to some discounts that had been implemented by some businesses after the summer.

UK’s strategy to reduce inflation

According to a forecast made by the Bank of England in July, Britain’s inflation rate was expected to reach as high as 13% in October, and then rise again in January, mainly due to rising energy bills as a result of the war in Ukraine. But those predictions ran up against the words of the newly sworn-in prime minister, Liz Truss, who announced that the British government would freeze energy bills for the next two winters at an average of 2,500 pounds ($2,880) a year.

Data from the Office for National Statistics (ONS), which is the office responsible for collecting statistical data in the United Kingdom showed that in August, gasoline prices fell by more than 14 pence per liter, thanks to a drop in oil prices. The annual inflation rate for fuel fell from 43.7% to 32.1% between July and August.

But while gasoline prices fell, food prices rose again. Food price inflation rose for the 13th consecutive month, touching a new 14-year high, and reaching a rate of 13.1% in August, with sharp increases especially in milk, cheese and eggs.

“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,”

wrote Samuel Tombs, economist at Pantheon Macroeconomics, in a note to clients. 

Despite the government’s intervention, the increase in energy bills will surely lead to higher inflation in October, which is expected to hit 11%, still lower than the 13% predicted by the Central Bank a month ago, according to experts.