U.K. inflation cools for first time in close to a year

Financial markets see an 80 per cent chance that the Bank of England will raise rates by 0.75 percentage points to 2.5 per cent on Sept. 22.

British consumer price inflation fell for the first time in almost a year in August as a drop in fuel prices offered some unexpected – and probably brief – respite to households and the Bank of England.

Annual consumer price growth slowed to 9.9 per cent from July’s 40-year high of 10.1 per cent, the Office for National Statistics said on Wednesday. This was its first drop since September 2021 and below expectations in a Reuters poll for it to rise to 10.2 per cent.

However, economists warned inflation was likely to peak at around 11 per cent in October when a new household energy tariff cap begins, and said it could be slow to fall due to underlying pressures and new government fiscal stimulus.

“The Bank of England will have to continue turning the screws,” said Paul Dales, chief UK economist at consultancy Capital Economics.

Britain’s central bank had been expected to raise interest rates on Thursday, but it delayed the decision by a week following the death of Queen Elizabeth.

Financial markets see an 80 per cent chance that the BoE will raise rates by 0.75 percentage points to 2.5 per cent on Sept. 22. This would be its biggest rate rise since 1989, excluding a brief attempt to bolster sterling during a 1992 exchange rate crisis.

Most economists polled by Reuters think a half-point rise is more likely, but also expect the BoE to continue raising rates into next year, despite a slowing economy at risk of recession.

Britain has been hit hard by the surge in European natural gas prices caused by Russia’s invasion of Ukraine, which has added to post-COVID supply-chain bottlenecks and labor shortages, creating an intense squeeze on living standards.