Inflation dip takes economists by surprise

Irving Hamilton
October 17, 2018

The rate of inflation in the United Kingdom dropped sharply and somewhat unexpectedly in September, signalling that the surprise rise in prices last month was just a temporary blip in a longer downward trend for inflation in Britain.

Shoppers browse aisles in a supermarket in London, Britain April 11, 2017.

Analysts' consensus forecast had been for a dip in the CPI rate to 2.6 per cent.

Sterling fell against the dollar and euro while British government bond prices rose.

The Consumer Price Index figures came as a surprise to economists who were expecting inflation to fall to 2.6%. The news, which will be welcomed by consumers, follows yesterday's rise in wage growth.

That backed up the Bank of England's view that a long period of weak pay increases is ending, and that it should raise interest rates in response.

The Bank of England last month voted to leave its main interest rate unchanged, as it noted "greater uncertainty" surrounding Britain's departure from the European Union set for March next year.

Official figures published yesterday showed that wages rose at the fastest pace in nearly a decade in the three months to August.

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Still, the wage growth of 3.1 percent remained meagre by historical standards when adjusted for inflation.

Consumer price inflation hit a five-year high of 3.1 percent in November, when the inflationary effect of the pound's tumble after the Brexit vote in June 2016 reached its peak.

"The largest downward contribution came from food and non-alcoholic beverages where prices fell between August and September 2018 but rose between the same two months a year ago". Ferry prices dropped from a "surprisingly high" summer peak.

While that has started to subside, Wednesday's ONS figures suggested there could be more short-term pressure in the pipeline for consumer prices.

"The urban inflation rate increased by 11.70 percent (year-on-year) in September 2018 from 11.67 percent recorded in August 2018, while the rural inflation rate increased by 10.92 percent in September 2018 from 10.84 percent in August 2018".

Manufacturers increased the prices they charged by 3.1 percent compared with 2.9 percent in August, again stronger than all forecasts in the poll, which had pointed to a 2.9 percent increase.

"The composite food index rose by 13.31 percent in September 2018 compared to 13.16 percent in August 2018".

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