Boe likely to accelerate rate hikes despite inflation dip

inflation dip

Headline inflation eased back from 40-year highs to 9.9%, with the slower increase driven by lower petrol prices

UK CPI dipped for the first time since 2021 in August, but underlying inflation forces will keep pressure on the Bank of England to further accelerate its interest rate hikes, the industry has warned.

Headline inflation eased back from 40-year highs to 9.9%, with the slower increase driven by lower petrol prices. Despite this, core inflation, which strips out volatile food and energy prices, continued to rise, reaching a 30-year high of 6.3%.

Ben Laidler, global markets strategist at social investment network eToro, said that today’s lower-than-expected UK inflation figure ‘served up a welcome surprise, providing a small glimmer of positivity for our faltering economy’.

Nicholas Hyett, investment analyst at Wealth Club, said that while the moderation in inflation is welcome, he noted that ‘it is far too early to be celebrating victory in the war against rising prices’, arguing that it may be ‘just a short calm before the storm resumes’.

Following today’s inflation figures, all eyes will be on the Bank of England next week at its delayed Monetary Policy Committee meeting, where the central bank will confirm its decision on the path for interest rates.

While Laidler noted that lower headline inflation is a welcome step in the right direction, the stickiness of underlying inflation ‘will likely see the Bank of England put its foot on the gas next week, with a 0.75% interest rate increase’.

Other analysts are predicting a less aggressive hike. Rupert Thompson, investment strategist at Kingswood, said that the new inflation numbers may make a 0.75% hike in UK rates next week somewhat less likely, although ‘they look certain to be raised by at least 0.5%’.

Hargreaves Lansdown’s Susannah Streeter, senior investment and markets analyst, said that the slight drop in UK inflation ‘will ease pressure on policymakers and give them a bit more breathing space’.

Rates are still expected to head upwards when policymakers meet next week but a lower rise of 0.5% is now looking more likely, she said.

UK unemployment is now at a 50-year low, according to data by the Office for National Statistics released yesterday, which could continue to drive wage growth and fuel inflation.

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