Inflation to continue falling despite rising energy prices, experts predict
Inflation is expected to edge down again in September thanks to falling food prices, raising the chances that the Bank of England has completed its rate hiking cycle.
In August, inflation fell to 6.7 per cent thanks to falling food costs and tumbling accommodation prices. The fall confounded experts who had predicted a slight increase in inflation driven by rising energy prices.
While energy costs were expected to contribute to strong price growth in September, the continuing easing in food inflation will help bring the annual rate of inflation to around 6.5 per cent, experts predicted.
Sanjay Raja, chief UK economist at Deutsche Bank, said measures of food inflation had “all softened yet again”.
Recent data from the British Retail Consortium showed that food price inflation fell to 9.9 per cent in September, the lowest level in a year. Kantar data also showed a marked drop in grocery price inflation in September.
However, Philip Shaw, chief UK economist at Investec warned, that “there are certainly upside risks”, some of which “may already be crystallising”. He pointed to the surge in wholesale energy prices, driven by supply cuts, damaged pipelines and geopolitical tension.
Last week gas prices jumped to their highest level since June, with prices hitting £1.23 per therm after one of Israel’s largest gas fields closed.
In fact, Ruth Gregory, deputy chief UK economist at Capital Economics, predicted that inflation would pick up slightly in September as a result of surging energy costs. “The longer the conflict goes on, or the more widespread it becomes, the greater the upside risks to inflation,” she said.
Developments in inflation will be crucial to informing the Bank of England’s next interest rate decision in early November. The Bank left interest rates on hold in its most recent meeting, meaning the benchmark Bank rate stands at 5.25 per cent.
Most economists think that interest rates won’t go any higher, but speaking on the sidelines of the IMF’s annual meeting last week Andrew Bailey said “there has been solid progress in terms of showing signs that inflation is being tackled, but let’s not get carried away because there’s an awful lot still to do.”
Officials at the Bank will also keep a close eye on the latest labour market data, which is due out on Tuesday this week. The Bank of England has been persistently surprised by the strength of domestic wage growth, which it has flagged as a key indicator of inflationary persistence.
In the most recent reading, annual pay growth excluding bonuses averaged 7.8 per cent between May and July, the joint highest rate of pay growth since records began in 2001. Including bonuses, earnings growth came in at 8.5 per cent.
City analysts expect pay growth including bonuses will fall to 8.3 per cent, although pay including bonuses will remain stuck at 7.8 per cent.
Although this is higher than the Bank of England would like, economists think that pay growth will start to moderate as unemployment has increased more quickly than the Bank forecast. It currently stands at 4.3 per cent.
“Wages would still be rising too quickly for the MPC [Monetary Policy Committee] to tolerate indefinitely, but it will probably be willing to bet that growth will slow further in response to the recent increase in labour,” economists at Pantheon Macroeconomics said.