Higher fuel prices stop UK inflation from falling in September

LONDON – British consumer price inflation (CPI) held at an 18-month low of 6.7 per cent in September, official data showed on Wednesday, bucking economists’ expectations for a further decline and raising the possibility of a further rise in interest rates.

A rise in petrol prices between August and September was the main factor stopping a fall in the annual rate, the Office for National Statistics said.

But two other less volatile measures closely watched by the Bank of England (BOE) – core inflation and services prices – were also robust, which is likely to leave some policymakers worried about longer-term price pressures.

“Progress in bringing inflation down is proving slow,” said Deloitte chief economist Ian Stewart. “The persistence of underlying inflation and service price pressures suggest that interest rates are likely to stay close to current levels for much of the next year.”

Sterling rose and British government bond prices fell after the data, as financial markets judged another rate rise by the BOE is more likely than not – though not necessarily as soon as Nov 2, when the central bank announces its next decision.

In September, the BOE kept interest rates on hold for the first time since it started its tightening cycle in December 2021, following an unexpected fall in inflation in August and other weaker data.

The central bank’s chief economist Huw Pill said last week that the question of further rate rises was “finely balanced” and Governor Andrew Bailey predicted future votes would be “tight”, following on from September’s 5-4 split.

Wednesday’s data showed core inflation – which excludes volatile food, energy, alcohol and tobacco prices and is sometimes seen as giving a better guide to underlying price trends – fell less than expected to 6.1 per cent in September from August’s 6.2 per cent.

Services price inflation – another CPI component the BOE studies as it shows the impact of rising domestic labour costs on consumers – rose to 6.9 per cent in September from 6.8 per cent.

Prices charged by manufacturers – considered a good indicator of future inflation by some BOE policymakers – fell by an annual 0.1 per cent in September after a 0.5 per cent annual drop in August.

Raw data for the headline CPI came within a whisker of giving an inflation reading that would have been rounded down to the 6.6 per cent rate expected by economists polled by Reuters.

British CPI hit a

41-year high of 11.1 per cent in October 2022

after European energy prices soared following

Russia’s invasion of Ukraine,

adding to pressures caused by supply chain difficulties and labour shortages following the Covid-19 pandemic.

In its last set of forecasts in August, the BOE predicted inflation would stay above its 2 per cent target until early 2025.

Britain’s government is keenly eyeing inflation too, after

Prime Minister Rishi Sunak pledged to halve it at the start of 2023,

and many households have seen their standard of living fall as wages have struggled to keep up with prices. Food prices, a worry for many poorer households, were 12.1 per cent higher in September than a year earlier.

“As we have seen across other Group of Seven countries, inflation rarely falls in a straight line, but if we stick to our plan then we still expect it to keep falling this year,” Finance Minister Jeremy Hunt said after the data. REUTERS