Economy: UK inflation eases to 6.7 per cent in August

The Office for National Statistics has released the latest inflation data which showed a slight easing in the rising cost of living, with inflation at 6.7 per cent in August.

Alice Haine, personal finance analyst at Bestinvest said the fight against inflation was succeeding but there is still work to be done. She said that while inflation is continuing to ease, fears of a blip have been rising in recent weeks amid surging oil prices and strong annual wage growth.

She pointed out average pay hitting a record 7.8 per cent two months in a row and total wages including bonuses accelerating to 8.5 per cent in the three months to July. 

Food price inflation fell to 13.6 per cent in the 12 months to August from 14.8 per cent in July.

Haine said further comfort can be found in the core inflation data – which strips out the more volatile items such as food and energy and dipped more convincingly to 6.2 per cent, from the 6.9% seen in the previous two months. 

Interest rate decision

Haine added: "While easing inflation is positive for the Bank of England as it means its strategy is working, it may be too soon to put the brakes on interest rate hikes just yet if it really wants to tame persistent inflation for good and bring it closer to its target of 2 per cent.

"Instead, the central bank is widely expected to push ahead with a 25 basis-point hike at its Monetary Policy Committee (MPC) meeting on Thursday as it looks to win the battle against stubbornly high inflation – even if this risks sending the UK economy into a mild recession."   

Charles White Thomson, chief executive at Saxo UK, said that while inflation appeared to be slowing the UK remained an inflationary outlier. He said: "The pressure remains on the Bank of England (BoE) to suppress and manage inflation - or public enemy number one - and we expect a 25bp interest rate hike to 5.5 per cent.on the 21st September.”

Recession fears remain

Richard Carter, head of fixed interest research at Quilter Cheviot said the Bank of England has had a tough task in navigating its fight against inflation.

He said while morning’s figures suggest it may finally be having a real impact earlier this week the OECD forecast the UK to have the highest inflation rate among the G7 nations, expecting it to average 7.2 per cent in 2023 – a rise on its previous forecast of 6.9 per cent.

Carter said: "Households remain under immense pressure given inflation is still well above the BoE’s tw target and these figures will come as a blow, not least because the Bank of England is still expected to keep its foot on the pedal for now.

“Economic data has begun to sour and businesses and consumers appear to be starting to buckle following the sharp increase in interest rates over the last 18 months. The rate at which the BoE hiked rates to 5.25 per cent means the toll could be rather severe, and a recession is not yet entirely off the cards so the BoE will need to tread very carefully.

 “The inflation figure also has real political ramifications too. While this downtick is a positive, it will need to fall considerably more in order to meet Rishi Sunak’s target to cut inflation in half by the end of the year. With an election at most a year away, failing to hit that target would hurt the credibility of the Conservatives and make a Labour victory more likely. While a pause in interest rates is nearing, the beginning of political volatility will begin to come into view for markets.”