UK – Inflation

UK inflation slowed in August on the back of a fall in fuel prices, though food prices continued to rise as the country's cost-of-living crisis persists.

August headline inflation rose 9.9% y/y from 10.1% in July. Month-on-month, consumer prices rose 0.5%, versus 0.6% in July.

Core inflation, which excludes volatile energy, food, alcohol and tobacco, was up 0.8% month-on-month (0.3% in July) and 6.3% y/y (6.2% y/y in July).

A fall in the price of motor fuels caused the biggest reduction in both the CPIH and CPI annual inflation rates between July and August 2022. But this was offset by the rising food prices, which made the largest upward contribution to the change in the rates.

The economy has been hit by a historic cost-of-living crisis in 2022 as food and energy prices skyrocket and pay increases fail to keep pace with inflation, which has led to one of the sharpest falls in real wages on record.

With the cap on energy bills, it may result in inflation peaking much earlier. Capping annual household energy bills at £2,500 (US$2,881.90) for the next two years, with an equivalent guarantee for businesses over the next six months and further support in the pipeline for vulnerable sectors should cost the public purse around £130 billion. This would dim the inflation outlook in the short term but would brighten it over the medium term.

But this may not be the case. While the energy plan could help, it comes at the cost of higher levels of borrowing and government spending which could encourage the Bank of England (BoE) to hike rates even further than originally expected.

The BoE is set to announce its latest monetary policy decision next Thursday after a delay due to the death of Queen Elizabeth II. We now expect the BoE to likely push rates up by 75bps instead of 50bps in a move to stem inflation which should peak around 13.3% by the end of 2022.

Source: AmInvest Research - 15 Sept 2022