In more detail into the numbers: Core inflation slowed faster than expected.
The volatility and international nature of energy prices mean that policymakers are also closely watching other measures of inflation to determine how price growth has become anchored in the economy.
A key indicator of domestic price pressure is core inflation, which ignores energy and food costs. Last month, core annual inflation fell to 6.2 percent from 6.9 percent in July, a faster decline than economists had predicted. The trigger was a slowdown in inflation in the services sector, another important metric because it reflects companies’ labor costs – wages are typically a persistent inflationary force.
Why it matters: The government has promised to halve inflation.
With household budgets under pressure from high energy bills, food prices and other costs, Wednesday’s data will provide some confidence that inflation is easing. The headline inflation rate has slowed significantly since its peak in October, when it climbed above 11 percent.
British Prime Minister Rishi Sunak pledged to halve inflation this year, a goal he is well on track to achieve. But prices are still rising uncomfortably quickly and the government has remained cautious. On Wednesday, Jeremy Hunt, Britain’s top finance official, said the government would “stick to our plan” to halve inflation “so we can ease the pressure on families and businesses.”
How Great Britain compares: Higher energy prices lead to new inflationary pressure.
Although progress has been made in many countries in reducing price pressures, central bankers have been wary of declaring victory too early as inflation rates are still above their targets. Rising energy prices pushed up inflation in the United States last month and added to inflationary pressures in other European countries.
But the overall inflation rate in Britain is still much higher than in the United States, where prices rose 3.7 percent in August, and in the euro zone, where price growth in the 20 countries that use the euro averaged 5.2 percent was.
While some differences can be explained by how these countries respond to changes in wholesale energy prices, there are other signs that inflation is more persistent in the UK. Core inflation is also higher in the UK as the country faces faster-than-expected private sector wage growth due to tight labor markets.
What’s next: Britain’s central bank will set interest rates on Thursday.
The Bank of England has raised interest rates to their highest level in 15 years in a bid to curb high inflation. Policymakers are trying to strike a balance between tightening policy enough to bring inflation back to the central bank’s 2 percent target without plunging the economy into recession.
The latest interest rate decision will be announced on Thursday. For months, members of the interest rate committee have been divided over whether they should take more action to reduce inflation or risk overdoing it and causing unnecessary damage.
So far, the majority of policymakers have voted to increase interest rates. But amid signs that inflation is slowing and the U.K. economy is weak, bets are growing among investors that the central bank could hold off on raising interest rates this week.
Wednesday’s inflation data came in below the central bank’s forecast last month, a positive surprise that is likely to raise expectations that the bank will pause this week.