UK inflation unexpectedly falls to 9.9% in August as fuel prices ease

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inflation  A woman fills up a vehicle at a petrol station in Manchester, Britain, on April 13, 2022. Britain's Consumer Prices Index CPI rose by 7 percent in the 12 months to March 2022, up from 6.2 percent in February, hitting a new 30-year high, official statistics showed Wednesday. (Photo by Jon Super/Xinhua via Getty Images)
Food prices continued to soar, but falling fuel costs helped ease the annual inflation rate. Photo: Jon Super/Xinhua via Getty

The UK’s rate of inflation eased in August after registering a double digit increase for the first time in more than four decades the month before.

Consumer price index (CPI) inflation fell to 9.9% in the 12 months to August, according to the Office for National Statistics (ONS) on Wednesday.

This was below economists’ expectations that the rate would remain steady, and below the 10.1% jump registered in July — its highest level since February 1982.

However core prices, which exclude volatile items like energy and food, ticked up to 6.3% from 6.2%, suggesting price rises are firmly embedded across the economy.

Fuel prices were the largest contributor to the downward move while food costs were the biggest driver of inflation last month.

The annual rate for motor fuels eased from 43.7% to 32.1% between July and August, reflecting a 6.8% drop in the cost of petrol versus the 1.3% increase recorded in 2021. Diesel prices fell by 11.3p per litre this year.

UK inflation. Chart: Office for National Statistics
UK inflation. Chart: Office for National Statistics

Food prices rose 1.5% between July and August — the largest July to August lift since 1995 — with the costs of milk, cheese and eggs contributing the biggest upward effect.

At an annual rate, food and non-alcoholic drinks surged to 13.1% in August, up from 12.7% in July, marking the highest rate since August 2008.

"Petrol prices tend to be more of a concern for those on higher incomes, who may own more cars, drive more, and favour bigger gas-guzzlers," Sarah Coles, senior personal finance analyst at Hargreaves Lansdown said.

Read more: UK unemployment falls to lowest rate since 1974 but pay lags behind inflation

"Meanwhile, those on the lowest incomes, who are suffering the most as a result of rising prices, are still facing impossible energy bills and horrible hikes in the cost of food."

Clothing and footwear climbed 7.6% in the year to August, up from 6.6% in July.

It comes as Liz Truss last week announced a limit on UK energy bills, capping bills at £2,500 a year for two years, a move economists say will prevent a further spike in prices this winter but keep inflation strong into 2023.

UK energy prices will be frozen for two years, prime minister Liz Truss has announced. Chart: Yahoo News UK
UK energy prices will be frozen for two years, prime minister Liz Truss has announced. Chart: Yahoo News UK

Analysts expect inflation to remain higher for lower income households as they still "face double-digit" inflation.

Jack Leslie, senior economist at the Resolution Foundation, said: "High inflation continues to drive Britain’s cost of living crisis, but the outlook has brightened considerably over the past week.

"However, high inflation is set to be with us for some time, particularly for low-income households who continue to be hit hardest by high prices."

The think tank expects the government’s energy price guarantee to slash inflation by around four percentage points relative to what it could have risen by, preventing a fresh surge in prices this winter.

Meanwhile the labour market continues to show signs of tightness as separate figures on Tuesday showed unemployment fell to the lowest rate since 1974, according to the ONS.

The drop puts more pressure on businesses as hiring costs rise but wages still lag inflation, which, coupled with the energy bailout, could overheat the labour market and further push up prices.

That could force the Bank of England (BoE) to raise rates more aggressively to prevent a wage spiral.

Read more: UK economy grows slower than expected as higher prices hit growth

The BoE is expected to maintain its hawkish path at its next meeting on 22 September when the Monetary Policy Committee is due to meet after postponing it for a week following the death of Queen Elizabeth II on Thursday 8 September.

Threadneedle Street has so far raised interest rates across six consecutive meetings, increasing them by 50 basis points to 1.75%. Economists anticipate another 0.5% hike and rates to reach at least 3% by the end of the year.

"The MPC appears unlikely to adopt a markedly more dovish approach in response to the good news on inflation," Martin Beck, chief economic advisor to the EY ITEM Club said.

"It would seem the committee is likely to be concerned about the implications of much looser fiscal policy for inflation over the medium-term.

"Indeed, if the committee doesn’t opt for a 50bps hike, it will almost certainly be because its members have opted for a larger increase."

Britain is also teetering on the brink of recession as the economy expanded less-than-expected in July as the soaring cost of living continues to darken the outlook.

Gross domestic product (GDP) grew 0.2% in the month following a 0.6% slump in June, when activity was hit by the extra bank holiday to mark the Queen's Platinum Jubilee.

And analysts have warned that another additional public holiday for the Queen's funeral on 19 September could tip the UK economy into recession as the nation grinds to a halt to mourn the monarch.

Watch: How does inflation affect interest rates?