Deeper into the numbers: Core inflation eased faster than expected.
Policymakers are closely watching other measures of inflation to determine how the volatility and international nature of energy prices have changed price growth embedded in the economy.
A key measure of domestic price pressures is core inflation, which strips out energy and food costs. Last month, the annual rate of core inflation fell to 6.2 percent from 6.9 percent in July, falling faster than economists had predicted. This was driven by a slowdown in services inflation, another key measure because it reflects firms’ labor costs – wages tend to be the constant force behind inflation.
Why it matters: The government pledged to halve inflation.
As household budgets are squeezed by higher energy bills, higher grocery prices and other costs, Wednesday’s data will fuel hopes of easing inflation. The core rate of inflation has declined meaningfully from its peak in October when it rose above 11 percent.
British Prime Minister Rishi Sunak has pledged to halve inflation this year. But price growth is still at an unsettling pace and the government remains cautious. On Wednesday, Britain’s top finance official Jeremy Hunt said the government would “stick to our plan” to halve inflation.
How Britain compares: Higher energy prices reignite inflationary pressures.
Despite progress in easing price pressures in many countries, central bankers are wary of declaring victory too soon, with inflation rates still above targets. Rising energy prices pushed up inflation in the US last month and added to inflationary pressures in other European countries.
But the headline rate of inflation in Britain is still higher than in the US, where prices rose 3.7 per cent in August. EurozoneIn the 20 countries that use the euro, price growth averaged 5.2 percent.
While some of the differences can be explained by how these countries respond to changes in aggregate energy prices, there are other signs that inflation in Britain is likely to remain stable. Core inflation is also high in Britain, which it faces Wage growth faster than expected In the private sector due to tight labor market.
What’s next: Britain’s central bank will set interest rates on Thursday.
The Bank of England has raised interest rates to a 15-year low in a bid to curb high inflation. Policymakers are trying to find a balance between tightening policy enough to return inflation to the central bank’s 2 percent target without pushing the economy into recession.
The latest decision on interest rates will be announced on Thursday. Members of the price-setting committee have been divided for months over whether to take more action to reduce inflation or risk doing too much of it and cause unnecessary damage.
Policymakers voted to increase rates, and so far have been the majority. But there are growing challenges among investors that the central bank could hold off on raising interest rates this week, amid signs that inflation is slowing and the British economy is weakening.
Wednesday’s inflation data came in below the central bank’s forecast last month, a positive surprise that boosted expectations of a bank pause this week.
