Although the Latest Fall in UK Inflation in August to 9.9 per cent Looks Positive, Underlying Inflation Still Remains at Record High Levels

Main points

• Headline consumer price inflation decreased to 9.9 per cent in August 2022 from 10.1 per cent in July. However, NIESR’s measure of underlying inflation which excludes 5 per cent of the highest and lowest price changes, increased further to a new series high of 7.8 per cent from 7.2 per cent in July.
• Between July and August, the transport sector was the main driver of lower headline inflation; this sector contributed almost 0.4 percentage points to the change in the headline figure.
• Our analysis suggests that in August, approximately 32 per cent of goods and services prices changed with almost 20,000 items recording price increases, while 3.8 per cent of prices were reduced due to sales and 4.2 per cent fell for other reasons.
• Underlying inflation increased in each of the 12 UK regions in August. Underlying inflation in the East Midlands remained the highest at 8.6 per cent, while Southeast of England had the lowest rate at 7.4 per cent in August.
• Despite the latest fall in headline inflation, annual CPI inflation is expected to rise again because of the hike in the energy price cap in October 2022. Elevated inflation continues to burn a hole through consumer pockets, drag on economic growth and intensify economic uncertainty.
• NIESR forecasts annual CPI inflation to peak around 11.5 per cent in the first quarter of 2023, and not return to target until the end of 2024. With inflation remaining above target until the end of 2024, the labour market now experiencing a slowdown in the demand for candidates and the UK economy expected to stay in recession until the first quarter of 2023, the Bank of England’s dilemma continues to intensify.

“Annual headline CPI inflation decreased to 9.9 per cent in August from 10.1 per cent in July, driven by lower fuel prices. Although the latest fall in annual headline CPI inflation looks positive for the UK economy, NIESR’s measure of underlying inflation, which excludes extreme price movements, increased to a new series high of 7.8 per cent in August from 7.2 per cent in July. Underlying inflation increased in all of the 12 UK regions in August, although inflation in the East Midlands remained the highest at 8.6 per cent, compared with 7.4 per cent in the Southeast of England. Despite the latest fall in headline inflation, annual CPI inflation is expected to rise again because of the hike in the energy price cap in October 2022 and NIESR forecasts annual CPI inflation to peak around 11.5 per cent at the start of 2023.”

Urvish Patel
Associate Economist, Macroeconomic Modelling and Forecasting