UK Reaction: Falling petrol prices sees August CPI inflation ease
- 14 September 2022 (5 min read)
• CPI inflation eased to 9.9% year-on-year (y/y) in August down from 10.1% in July, as declining petrol prices pushed the headline lower. This came below consensus estimates of a smaller decline to 10%.
• Core inflation picked up in August rising to 6.3% above consensus estimates of core remaining at July’s 6.2%.
• The government’s energy bills freeze reduces our expected inflation peak by around 3 percentage points (ppt), we now expect inflation to peak in October around 10.6% compared to January around 13.6% prior. We expect inflation to average 9.0% this year and 5.6% next year.
• We continue to expect the Monetary Policy Committee (MPC) to increase rates by 75 basis points (bps) in September, but the risk of a 50bp hike remains. We suspect that rising core, continued tightening in the labour market and a consideration of sterling weakness will see the MPC step up their pace of tightening.
Consumer Price Index (CPI) inflation eased to 9.9% (y/y) in August down from 10.1% in July, as declining petrol prices pushed the headline lower. This reading came a touch below consensus estimates of 10.0%. Core CPI inflation (excluding food, energy, tobacco and alcohol prices) picked up again in August, rising to 6.3% (from 6.2% in July), above consensus estimates of core CPI remaining at 6.2%. Retail Price Index (RPI) inflation remained at 12.3% whilst Retail Price Index excluding mortgage interest payments (RPIX) eased to 12.2%.
Falling petrol and diesel prices in August drove the decline in inflation contributing -0.3 percentage points to the overall -0.2 ppt fall in inflation. The strong falls in fuel were somewhat offset by continued rises in the price of food. Food and non-alcoholic beverage prices rose by 13.1% in August (y/y) up from 12.7% in July, with the rate of food inflation standing at the highest since August 2008. Core inflation also picked up in August driven by increases in core services prices.
The government’s energy bills freeze reduces our expected inflation peak by around 3 ppt, we now expect inflation to peak in October around 10.6% compared to January around 13.6% prior. The support to growth provided by the cap means that while we expect lower headline CPI, we now see further risks to the upside for core inflation. We now expect inflation to average 9.0% this year and 5.6% next year.
At present, we expect the Bank of England to hike Bank Rate by 75bp in September. The risk of a smaller 50bp move in September remains and the easing of inflation in this print will keep the option firmly on the table but increases in core inflation and the continued tightening of the labour market raise the prospect of higher medium-term inflation adding to arguments to accelerate the pace of tightening. We then expect further 50bp hikes in November and December bringing Bank Rate to 3.50%.
Following the release of the data, the pound fell against the dollar by 0.2% as markets reacted to the downside surprise in inflation. Following this the pound retraced these declines at the time of writing.
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