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It does mean that The Bank of England may not increase interest rates any further tomorrow, which comes as a surprise to world economists. Even Jeremy Hunt had predicted a “blip” in the downward path for inflation fuelled by higher petrol and diesel prices.
The surprise fall in the inflation rate to its lowest level since February last year confounded City expectations for a modest increase to 7%, so it might be that our Bank of England base rate might stay at 5.25% for another month at least. Or, if it is put up to 5.5% – as has been widely expected – that could be the peak for a while.
Sadly, this reduction in the inflation rate doesn’t mean that prices are falling, only that they are rising at a slower pace. While the rate of increase for the cost of food and drink cooled sharply, prices were still 13.6% higher in August compared with a year earlier, down from a peak annual rate of about 19% earlier this year.
Currently oil is $100 a barrel, twice the price that it was a year or so ago. This affects the price of petrol and diesel which has a knock-on effect on the price of pretty much any goods and services that involve transport.
Danni Hewson of AJ Bell said: “Although inflation is falling, that doesn’t mean prices are coming down, and if the Bank of England has grounds to at least skip this rate hike that’s because cracks are beginning to form.
“This winter will still be incredibly tough for millions of households and if it’s a long, cold winter, what had been difficult choices last year may yet become impossible.”
The ONS report said the “largest impact on food and drink inflation was from milk, cheese, and eggs, where prices fell sharply between July and August but was still up by about 15% compared with a year ago. The cost of vegetables, as well as fresh, chilled and frozen fish and seafood, also fell on the month.”
Let’s remember that even with this drop in rates, the UK remains an international outlier, with the highest inflation rate among all G7 economies.
Rachel Reeves, Labour’s shadow chancellor, said: “The prime minister is too weak to turn things around, while his predecessor Liz Truss continues to call for the same policies that crashed the economy this time last year.
“The Conservatives have wreaked havoc and working people are paying the price.”