Yahoo Finance UK inflation slows unexpectedly to 6.7% ahead of interest rate decision
UK inflation slowed to 6.7% in the year to August, down from July’s 6.8%, despite a rise in fuel prices.
Economists had expected Consumer Price Index (CPI) inflation to rise to 7% but the price rises declined to their lowest level since February 2022.
Chancellor Jeremy Hunt earlier this month warned that inflation could move higher as average fuel prices jumped back above £1.50 a litre.
The average price of petrol rose by 5.3p per litre between July and August, to 148.5p per litre, while diesel prices climbed 5.9p per litre to 151.1p, the Office for National Statistics (ONS) said on Wednesday.
Grant Fitzner, chief economist at the Office for National Statistics, 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."
Read more: Energy bills: What to expect this winter
“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, which strips out energy, food, alcohol and tobacco, dropped to 6.2%. This is a sharp fall from the July's figure, which came in at 6.9%.
Hunt said: "Today’s news shows the plan to deal with inflation is working — plain and simple. 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.”
UK interest rates, at 5.25%, are almost three times above the Bank of England's (BoE) 2% target, meaning there is still some pressure for the Monetary Policy Committee (MPC) to raise rates on Thursday.
"This is very welcome news for consumers and the Bank of England alike and will reinforce the sense that UK interest rates are close to peaking," Charlie Huggins, manager of the 'Quality Shares Portfolio' at Wealth Club, said.
"Moderating inflation is also good news for homeowners and first time buyers, with mortgage rates coming down in recent weeks. With these latest inflation figures, the prospect of further cuts to the cost of borrowing in the coming weeks has increased."
He added: "We are not yet out of the woods. Wages are rising rapidly, sterling still remains weak and oil prices are going up. All of these things have potential to cause further inflationary headaches for the Bank of England."
The pound (GBPUSD=X) dropped to its lowest level in almost four months on the back of the news, down 0.4% against the dollar to $1.2345 — its weakest since late May. Sterling is also now at its lowest level against the euro (GBPEUR=X) since early August.
It comes as oil prices climbed to their highest levels this year, with Brent crude (BZ=F) rising to more than $95 per barrel on Tuesday, adding to global inflationary pressures.
Watch: How does inflation affect interest rates?
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