According to data released by the Office for National Statistics, in August U.K. inflation slowed. Consumer price inflation dropped 0.1 per cent from July to 2.5 per cent, taking the figure slowly closer to the Bank of England’s inflation target of 2 per cent. This corroborated the median prediction of 32 economists participating in a survey for Bloomberg news agency. Core annual inflation also slowed in August. This figure, which doesn’t take into account energy prices, food, alcohol or tobacco, was down from 2.3 per cent to 2.1 per cent.
The ONS stated that the annual inflation rate was brought down by alleviated price pressures regarding clothing, health, household services and furniture. In August bills for household services like electricity and gas were unaltered despite rising in the same period last year by 1 and 1.7 per cent respectively.
Transport costs were responsible for the largest upward effect on August inflation as, since July, the price of gasoline has risen by 3.5 per cent a litre.
After reaching a high of 5.2 per cent in September 2012 inflation has been falling and if the target of 2 per cent can be achieved over the next few months’ consumption will receive a much needed boost as the spending power of Briton’s increases.
An economist with London based Westpac Banking Corp shared his forecast before the data was released and commented: ‘The weakness in the economy means inflation is heading lower.’ James Shugg then added; ‘We see it getting down to 2 per cent at the end of the year, and there may be another [Central Bank] increase in quantitative easing’.
This news gives the BoE the wiggle room they needed to decide on the controversial matter of additional fiscal stimulus measures, but the central bank may not want to release that sigh of relief just yet. Food commodity prices have been pushed up due to both increasing oil costs and the U.S. drought and it appears increasingly likely that we have yet to feel the full burden of these issues.
Furthermore, cooling inflation can mean that consumer spending is undermined as wage growth is outpaced. Last week policy makers Ben Broadbent and Spencer Dale explicitly commented on inflation risks. Dale even warned against ‘Pavlovian’ cries for more stimulus.
Tomorrow the minutes of this month’s policy meeting will be released by the BoE and they will reveal how officials voted when the decision was made to hold the bond-purchase target at 375 billion pounds.
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