Latest inflation drop may see interest rates rise for first time in 5 years

Supermarket price wars helped to push down the annual rate of UK inflation last month, according to the Office for National Statistics, with the cost of food, non-alcoholic drinks and petrol all in decline.

Figures show that Consumer Price Index (CPI) inflation dropped 0.1% to 1.5% in August, well below the Bank of England’s target maximum of 2%. This will ease pressure on the bank as it considers whether to loosen its grip on the 0.5% interest rate held for the past 5 years, allowing interest rates for borrowing to creep up to normal levels.

Retail Price Index (RPI) inflation also saw a reduction of 0.1%, falling to 2.4%, whilst food prices of food dropped by 1.1% – the sharpest decline in a decade. Core inflation, however, which disregards food, alcohol, tobacco and energy, rose by 1.9%.

Howard Archer, Chief UK and European Economist at IHS Global Insight, said: “August’s muted consumer price inflation is welcome news for consumers’ purchasing power as they currently continue to be hampered by very low earnings growth. Indeed, even consumer price inflation of 1.5% in August is still more than double current underlying earnings growth.”



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