Inflation eases unexpectedly in August

Inflation, as measured by CPI, dropped to 9.9% in the 12 months to August, down from 10.1% in July. This is partly driven by a reduction in price for fuel, but was offset by higher food, electricity and gas costs.

The Bank of England predicted that inflation could peak at 13% this year.

Simon Webb, managing director of capital markets and finance at LiveMore, commented:

“Rather unexpectedly, CPI inflation fell by 0.2% in August, down to 9.9%. Now that the energy price cap has been reduced by the new government to £2,500 from October, inflation is expected to be dampened to some extent. However, this is almost twice as high as this time last year when the energy price cap was set at £1,277, so many people are still experiencing significant increases in their cost of living.

“It is inevitable that the Bank of England will raise base rate next week, the question is by how much? The industry guess work is anywhere between 0.5% and 0.75%. Whatever the increase, let’s hope it’s sufficient to help contain inflation and avoid tipping the base rate environment into territory not seen for 14 years."

Nicholas Hyett, investment analyst at Wealth Club, said:

"Inflation moderated slightly in August, but it is far too early to be celebrating victory in the war against rising prices.

"Critical everyday items like food and home heating continue to get more expensive, sucking disposable cash out of consumer wallets. As well as making everyone's lives more miserable that has repercussions for businesses across the UK's service economy. When times are tough, belts are tightened and people focus on the essentials - restaurant trips, new cars and holidays all start to get delayed, putting businesses under pressure and jobs at risk.

"The shape of inflation is also a concern. Inflation driven by food, electricity and gas will likely hit the poorest hardest - since they spend a far greater proportion of their income on essential goods than the wealthy. Government plans to cap energy prices will help to some degree, but it may be that more support is needed over the winter if prices accelerate away once again. Concern about the state of the UK economy and pace of government spending is already weighing on the price of sterling, and acting as a key driver of inflation. Further demands on the public purse would make things worse but may be unavoidable.

"Today's moderation in inflation is welcome, but it may be just a short calm before the storm resumes."

Richard Pike, chief sales and marketing officer at Phoebus, says:

“Even though we are seeing the cost of fuel coming down on forecourts across the country, everything else is becoming more expensive.  The Prime Minister’s energy support package will undoubtedly make a difference, but if businesses don’t get the same support, then consumers will be paying higher prices across the board.  Added to this we hear that, although we now have the lowest unemployment rate in almost 50 years with more jobs available than people to fill them, real wages are not keeping pace with rising costs. At the same time employers are already reporting having to increase wages to entice would be employees, this too will be a cost that will have to be passed on to consumers.  We expect that the Bank of England will increase interest rates again next week, but it is difficult to see how, at this rate, it can do anything to alleviate increasing inflation.

“So for borrowers this is a time to take stock, as interest rates rise lenders will be forced into increasing mortgage rates.  We have already seen the average rate pass 4%, which will of course put more pressure on households.  The figures on arrears from the Bank of England yesterday showed that the value of mortgages in arrears fell in the second quarter, which is something of a false positive.  This quarterly data is now months out of date and interest rates and inflation have been increasing since the end of the period.  With this in mind it is only inevitable that the figures we will see in December for Q3 will show a reversal of this trend.  For lenders there are sure to be a number of vulnerable borrowers that are already starting to worry and will need to know where they can get the help they need, before things get too late.  The onus of responsibility is with lenders now to ensure that vulnerable clients get that help.”