Inflation unexpectedly slows to lowest rate in 18 months

By Anna Wise, PA Business Reporter

UK inflation unexpectedly eased in August as a drop in hotel and air fare costs and a slowdown in food price rises helped offset a jump in fuel costs, according to official figures.

The surprise fall could take the pressure off the Bank of England to lift interest rates on Thursday.

The Office for National Statistics (ONS) said Consumer Prices Index (CPI) inflation was 6.7% in August, down from 6.8% in July.

It marks the lowest rate since February last year.

Analysts, and the Bank of England, had predicted inflation to accelerate last month to a reading of 7.1% due to a sharp rise in motor fuel amid a rebound in oil prices.

The surprise easing of CPI will be closely watched by the Bank’s policymakers who are meeting this week to decide whether to push through another interest rate hike.

Most economists have predicted that rates will rise again on Thursday, bringing the base rate to 5.5%, but August’s inflation reading could prompt policymakers to pause their cycle of rate rises.

Chancellor Jeremy Hunt claimed the fall in the CPI rate shows “the plan to deal with inflation is working – plain and simple”.

He added: “But it is still too high which is why it is all the more important to stick to our plan to halve it so we can ease the pressure on families and businesses.

“It is also the only path to sustainably higher growth.”

The Government in January pledged to halve inflation from 10.7% to around 5.3% by the end of the year.

Grant Fitzner, the ONS’s chief economist, said: “The rate of inflation eased slightly this month driven by falls in the often-erratic cost of overnight accommodation and air fares, as well as food prices rising by less than the same time last year.

“This was partially offset by an increase in the price of petrol and diesel compared with a steep decline at this time last year, following record prices seen in July 2022.

“Core inflation has slowed this month by more than the headline rate, driven by lower services prices.”

Food prices increased to 13.6% in August against the same month last year, easing back from 14.9% growth in July, with the largest falls coming from milk, cheese, eggs, vegetables and fish.

It means that UK consumers still face climbing prices in supermarkets as food inflation remains well in double digits.

Meanwhile, the average price of petrol rose by 5.3p per litre between July and August – compared with a much sharper drop in prices last year from a record high in July 2022.

It comes a day after the Organisation for Economic Co-operation and Development (OECD) forecast that the UK economy is set to witness the highest inflation rate of any G7 advanced economy.

The OECD said it expects UK inflation to be 7.2% in 2023, which would be the fastest rate across the G7 and the third fastest across the G20.