Large Falls in Underlying Inflation Ahead of Tomorrow’s MPC Meeting

Main points

• Annual consumer price inflation was 6.7 per cent in August, marginally decreasing from 6.8 per cent in July. This fall was largely driven by decreasing inflation rates in the food and non-alcoholic beverages as well as restaurants and hotels categories, though this was partially offset by increasing motor fuels prices.
• Food inflation fell to an annual rate of 13.6 per cent in August from 14.8 per cent in July. Still, that it remains so elevated is concerning since there is no government support to help households (especially lower income households, who spend a greater part of their incomes on food) offset this cost.
• Though the slight fall in the headline CPI rate was expected, and indeed in line with my colleague Huw Dixon’s ‘very high’ forecast last month, the underlying inflation data fell more significantly than expected. Core CPI rose by 6.2 per cent in the year to August, down from 6.9 per cent in July; annual services CPI inflation fell to 6.8 per cent in August from 7.4 per cent in July; and NIESR’s trimmed-mean CPI inflation estimate decreased to 7.9 per cent in August from 8.6 per cent in July. These measures may indicate that the monetary policy tightening is finally bringing core inflation back under control.
• The ONS recently released a new measure of persistence in CPIH inflation, identified as the part of inflation which is common to all goods and services in the index. The most recent data finds that, over the past two years, five of the ten most persistent components of CPIH inflation are labour intensive items, such as hairdressing, indicating that elevated inflation expectations feeding into wage growth has been a significant contributor to inflationary persistence in this time. The authors note that this finding is consistent with Federal Reserve research that proposes that services inflation is a more important driver of core inflation than goods inflation.

“Annual CPI inflation was 6.7 per cent in August, marginally down from 6.8 per cent in July, driven by falling food price inflation which was partially offset by rising motor fuel prices. Despite the minimal fall in the headline rate, it is encouraging that measures of underlying inflation fell substantially: core CPI rose by 6.2 per cent in the year to August, down from 6.9 per cent in July; annual services CPI inflation fell to 6.8 per cent in August from 7.4 per cent in July; and NIESR’s trimmed-mean CPI inflation estimate decreased to 7.9 per cent in August  from 8.6 per cent in July. Today’s data imply that if the MPC opt for a rate hike at tomorrow’s meeting, it could potentially be the last hike of the current monetary tightening cycle, conditional on future inflationary developments.”

 Paula Bejarano Carbo
Associate Economist, NIESR

For a breakdown of what inflation is and how it is calculated, read our blog post here.