Britain’s high inflation rate unexpectedly fell in August, official data showed on Wednesday (Sep 20), raising questions about how much higher the Bank of England (BOE) will take interest rates a day before its next policy announcement.

The consumer price index dropped to 6.7 per cent from July’s 6.8 per cent, confounding forecasts by economists polled by Reuters and the BOE for an increase.

The surprise drop in inflation to its lowest since February 2022 pushed sterling to its lowest against the US dollar since May. The pound also fell against the euro, as investors scaled back bets on future rate hikes by the BOE.

The Office for National Statistics said the fall was driven by a drop in hotel prices and airfares – which are often volatile – and by food prices rising by less than at the same time last year.

That offset a jump in fuel prices and an increase in a tax on alcoholic drinks.

The BOE said last month that it expected inflation in August would rise to 7.1 per cent before falling sharply to around 5 per cent in October, which would still be more than double its 2 per cent target.

GET BT IN YOUR INBOX DAILY

Start and end each day with the latest news stories and analyses delivered straight to your inbox.

Sign UpVIEW ALL

Investors had expected the BOE to raise interest rates for the 15th time in a row on Thursday, taking the Bank Rate to 5.5 per cent from 5.25 per cent.

That now looks much less certain, in the light of the inflation data. Investors have put a roughly 45 per cent chance on the BOE pausing its run of rate hikes on Thursday, up from about 20 per cent before the inflation figures were published.

Core inflation, which strips out volatile food and energy prices, fell by more than the headline rate to 6.2 per cent from 6.9 per cent in July. The Reuters poll had pointed to a reading of 6.8 per cent in August.

Price growth in Britain’s service sector – which is also being closely watched by the BOE – lost some of its steam as well, slowing to 6.8 per cent from 7.4 per cent in July.

As well as providing some relief to the BOE, which has come under criticism after inflation surpassed 11 per cent last October, the latest figures were welcomed by the government of Prime Minister Rishi Sunak. He has promised to halve inflation this year before an election expected in 2024.

“Today’s news shows the plan to deal with inflation is working – plain and simple,” finance minister Jeremy Hunt said.

“But it is still too high, which is why it is all the more important to stick to our plan to halve it, so we can ease the pressure on families and businesses. It is also the only path to sustainably higher growth.” REUTERS