(Bloomberg) -- Britain’s inflation rate eased from its highest rate in four decades after petrol declined, but still leaving the pace of price increases uncomfortably high for the Bank of England.
The Consumer Prices Index rose 9.9% from a year ago last month from 10.1% in July, the Office for National Statistics said Wednesday. Economists had expecting a reading of 10%.
The reading may fan speculation that inflation has already peaked, relieving some of the pressure on the central bank to act. Prime Minister Liz Truss announced plans to freeze an increase in energy bills due to hit households in consumers, a move economists say will prevent a further spike in prices this winter but keep inflation strong well into next year.
“The Bank of England continues to face a tough challenge to bring price growth back towards its target level,” said Rachel Winter, Partner at Killik & Co. “Policymakers have already hinted that they intend to deliver another increase in the base rate next week, given the ongoing underlying pressures.”
The pound erased earlier gains against the dollar following the release, trading at $1.1495 as of 7:11 a.m. in London.
The lower than expected figure in the UK is in stark contrast to Tuesday’s report in the U.S., which showed inflation remains hotter than most were predicting. That reading triggered rout in stocks as traders became more certain the Federal Reserve will raise interest rates three-quarters of a percentage point next week.
The BOE holds its own meeting next week, where investors are currently torn between anticipating either a 50 or 75 basis-point hike from the current 1.75%.
UK economists had anticipated a small decline in the inflation rate last month, reflecting a 6.8% drop in the cost of petrol instead of the 1.3% increase recorded a year ago. Food prices rose 1.5% and clothing climbed 1.1%, putting upward pressure on inflation.
Bloomberg Economics expects inflation to peak at 10.5% in October, well below the more than 13% forecast by the BOE in August before Truss made her announcement. Most forecasters including the BOE expect a rapid retreat in price growth next year, assuming the cost of natural gas and electricity doesn’t keep rising.
Core consumer prices, stripping out volatile alcohol, tobacco and fuel prices, accelerated to 6.3% in August from 6.2% the month before, a pace that economists expected would remain unchanged.
Producer input and output prices both fell unexpectedly for the first time since 2020, suggesting an easing of pipeline inflation pressures. Fuel and raw materials costs declined 1.2%, driven by cheaper crude oil. Factories cut their prices by 0.1%. Prices were still up sharply from a year earlier, however.
The cost of raw materials bought by producers fell 1.2% in August after little change in July.
Those prices remain too strong for many businesses, which are squeezed between rising labor and raw materials costs and a weakening economy.
“There is a limit to how long any firm can sustain these rising costs before something has to give. We know from our research that two thirds of businesses plan to increase their own prices.
“The size of last week’s Government intervention on energy prices should have a dampening effect on inflation when it is enacted.
“But the lack of detail on exactly how much help any individual business will get, and for how long, means very few will be planning to invest any time soon.
“There are also a whole host of other issues ranging from transport and shipping costs, raw material prices, energy sector regulation and the tight labor market that must be addressed,” said Alex Veitch, director of policy at the British Chambers of Commerce.