London

The United Kingdom witnessed a decline in inflation, with the rate dropping to 6.7 per cent in August, CNBC reported.

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The unexpected dip, has raised speculation about a potential pause in interest rate hikes by the Bank of England. On a monthly basis, the consumer price index (CPI) increased by a modest 0.3 per cent.

Economists had anticipated the annual CPI figure to reach 7 per cent, with a month-on-month rise of 0.7 per cent. However, the actual figures painted a different picture, with July recording a 6.8 per cent annual increase and a 0.4 per cent month-on-month decrease.

The Office for National Statistics attributed this decline to various factors. “The largest downward contributions to the monthly change in both CPIH and CPI annual rates came from food, where prices rose by less in August 2023 than a year ago, and accommodation services, where prices can be volatile and fell in August 2023,” BNBC quoted the agency as saying. Conversely, the rise in motor fuel prices had the most significant impact on pushing the annual rates upward.

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Core CPI, which excludes the influence of volatile factors like food, energy, alcohol, and tobacco prices, stood at 6.2 per cent for the 12 months ending in August, down from 6.9 per cent in July. While the goods rate experienced a slight increase from 6.1 per cent to 6.3 per cent, the services rate saw a notable slowdown from 7.4 per cent to 6.8 per cent.

Raoul Ruparel, director of Boston Consulting Group's Centre for Growth, highlighted the significance of this unexpected core inflation drop. He noted that this development, coupled with signs of retail price easing, suggests potential improvements in real wages for consumers. However, Ruparel also emphasised the challenges faced by the Bank of England as the economy appears to be slowing, and the full impact of rate hikes has yet to be felt.

The Bank of England is scheduled to announce its next monetary policy decision on Thursday, with the aim of reining in inflation and aligning it with the bank’s 2 per cent target. Market expectations had been leaning toward another 25-basis-point hike in interest rates, potentially bringing the main bank rate to 5.5 per cent, its highest level since December 2007.

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Following the surprising inflation data, market sentiment shifted. The probability of a pause from the Bank of England surged from 20 per cent to nearly 50 per cent.

Caroline Simmons, U.K. chief investment officer at UBS, expressed her belief that the central bank is still likely to proceed with a rate hike on Thursday. CNBC quoted her, "We do believe that's going to be their last hike, however, because we do have these downward forces on inflation."

According to her, while concerns regarding rising oil prices initially fuelled uncertainty about the inflation trend, the overall trajectory seems to be heading downward, potentially impacting the bank's decision-making process.

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