Commentary Directory

UK Inflation August Update: A Precursor to the Bank of England's Announcement

Jacob Hess
September 20, 2023

The UK's inflation data for August, released just before a highly anticipated Bank of England announcement, will set the stage for a huge decision of whether to pause or hike once again. The Consumer Price Index (CPI) for the UK rose by 0.3% MoM, reaching an annual rate of 6.7% YoY, a slight dip from July's 6.8%. This marks the lowest inflation rate since February 2022, a notable decline from the peak of 11.1% YoY in October 2022. The primary driver of this month's inflation was energy, mirroring trends observed in other countries. Despite a 1.7% MoM surge in the UK's energy CPI, it remains down by -3.2% YoY. Meanwhile, food inflation, which previously peaked at 14.8% YoY, has moderated, registering a 0.5% MoM increase and settling at 12.6% YoY. This reduction was influenced by a 1.5% MoM rise in alcohol and beverage prices, while non-processed and seasonal food prices both experienced a decline.

From ONS

The surprise today was in the core CPI, which saw a modest 0.2% MoM increase, bringing the annual rate down from 6.9% YoY to 6.2% YoY. This deceleration was largely attributed to the services sector, where prices remained unchanged for the month, resulting in a YoY rate of 6.8%. Several service segments, including travel & transport (-0.2% MoM), package holidays & accommodation (-1.0% MoM), and non-catering recreational & personal services (-0.8% MoM), reported deflationary trends. Consequently, the combined impact of the recreation & culture and restaurants & hotels segments led to a 0.24 ppt reduction in the annual CPI rate, though this was almost entirely offset by the influence of energy prices on the transport index. Goods inflation, influenced heavily by energy and food prices, rose by 0.5% MoM, reaching 6.3% YoY. Some segments, such as household goods (0.2% MoM) and non-energy industrial goods (0.3% MoM), showed signs of disinflation. Recreational goods prices actually declined (-0.2% MoM).

Producer Price Index (PPI) movements in the UK underscored the volatility of energy prices. Both input and output producer prices witnessed an uptick, largely due to surging crude oil input prices (12.1% MoM) and petroleum production prices (7.7% MoM). Notably, of the output PPI segments only petroleum products showed an upward contribution to the change in the annual inflation rate, at 1.42 ppts. This upwards contribution was greater in magnitude than the sum of the contributions of the other product groups.

The Bank of England, which has been a bit more hawkish than its other developed market central bank peers, has been closely monitoring wage and core CPI pressures, which have been more persistent in the UK than elsewhere. This latest report provides one of the first pieces of tangible evidence of inflation easing, primarily driven by a slowdown in service price growth and the largest deceleration in core CPI since the pandemic ended. However, most of disinflation was seen in recreation and travel categories and in just this one month, so it might be risky to change the perspective on inflation based on such a short-term, limited trend. On the other hand, there are signals from the labor market that the demand for hiring is cooling with vacancies falling and the unemployment rate starting to tick up. With that in mind, the Bank of England should be able to get away with a pause, and a clear guidance that it will raise rates in the future if progress on inflation is reversed.