Inflation in Britain may have peaked in August, or come very close to peaking, as consumer prices grew 9.9 percent from a year earlier, the first fall in over a year.
While this change in inflation’s trend will certainly be welcome news to policymakers, it will provide little solace to consumers. Despite the Bank of England’s efforts to stave off pressure to increase interest rates, families are nevertheless suffering the effects of inflation at its fastest pace in 40 years.
The Office of National Statistics released its latest inflation numbers on Wednesday, and they showed a decrease from July’s 10.1% to August’s 8%. The inflation rate fell due to less upward pressures from the costs of food and clothes, as well as a larger downward influence from the price of gasoline.
As the impacts of restaurants’ decision to stop extensive discounting the previous summer faded from yearly price change estimates, the inflation rate began to fall in September 2021.
Forecasts from the Bank of England last month predicted that Britain’s inflation rate will hit 13% in October and perhaps climb again in January, after increases in the government’s price ceiling on family energy bills in response to increasing wholesale natural gas costs. But last week’s announcement by newly minted Prime Minister Liz Truss that she would freeze energy rates at an average of £2,500 ($2,880) a year rendered such projections moot.
Ms. Truss predicted that the change might reduce inflation expectations by 5%.
The predictions of analysts were also swiftly reduced.
An economist at Pantheon Macroeconomics, Samuel Tombs, predicted in a letter to clients on Wednesday that the government’s new energy price ceiling would lead inflation to peak at just under 11 percent in October before “looking likely to decrease dramatically” the following year.
It is anticipated that the programme will reduce inflation, increase personal disposable income, and mitigate the effects of any potential recession.
Even if inflation as a whole doesn’t increase, the strategy might make high inflation last longer. Since people won’t have to save as much for gas and electricity thanks to the price freeze, that money may be used toward other priorities, like dining out and taking vacations. As a result, the government will continue to put pressure on the central bank to raise interest rates and curb the economy. There should be no more than a 2% annual increase in prices, according to the bank’s goal.
The rate of core inflation, which is calculated by excluding the effects of price changes in food and energy, rose to 6.3% in August from 6.2% in July.
Earlier this week, Huw Pill, the Bank of England’s chief economist, indicated that the central bank is more concerned with the medium-term effect of fiscal policy adjustments than with any short-term reduction in the primary inflation rate.
When policymakers gather next week, they are likely to decide to hike interest rates by another half point, to 2.25 percent, according to economists’ predictions. The conference was put off until a week following the end of the national mourning period for Queen Elizabeth II.
Inflation expectations over the medium term have softened, reducing the likelihood that authorities would “strangle the economy” by hiking interest rates to 4 percent, as some market participants had speculated.
Natural gas costs in particular have had a significant impact on inflation trends in Britain. However, the effect on inflation will remain long after energy costs have fallen. In order to offset the loss of earnings and the dwindling buying power brought on by increasing inflation, firms and employees will continue to raise prices and salaries over time. To combat this threat and dampen inflation expectations, central banks have been gradually increasing interest rates.
Data released on Tuesday revealed that U.S. inflation slowed less than predicted by experts. The stock market index S&P 500 fell more than 4% on that day, making it its worst day since June 2020 as investors braced for more action from the Federal Reserve.
There have been significant price hikes for many people in the United Kingdom. The price of milk, cheese, and eggs, in particular, contributed to the highest rate of food inflation in August (13.1%) in 14 years.
Online retailer Ocado said on Tuesday that shoppers were shopping for “value-for-money goods” and purchasing less as a result of rising prices. Over the previous 12 months, food costs there have risen by 7 percent.
The cost of living is rising faster than wages can. The three-month period ending in July saw one of the greatest declines in compensation (after adjusting for inflation) since similar records started two decades ago, down 2.8% from the same period a year earlier.
Several sectors of the American workforce are now on strike for higher wages to keep up with the growing cost of living. Later this month, strikers at Liverpool Port will coincide with those at Felixstowe Port, Britain’s biggest container ship terminal, for a total of eight days of disruption.