UK: Inflation soars to nearly a decade high – UOB

Lee Sue Ann, Economist at UOB Group, reviews the latest UK inflation figures for the month of August.

Key Takeaways

“Inflation in the UK climbed sharply in August, as CPI rose 3.2% y/y, the highest rate since March 2012. This compares with a 2.0% y/y increase in July, and above expectations for a 2.9% y/y reading. The increase of 1.2ppts in the annual rate of inflation is the largest ever recorded, which began in January 1997. The largest upward contribution to this came from restaurants and hotels, given the low base created by the sales tax cut for the hospitality sector and the government's Eat Out to Help Out scheme. On a monthly basis, CPI increased 0.7% m/m in August, compared with a reading of 0.0% m/m in July.”

“The Bank of England (BOE) meets on 23 September. The central bank now expects annual price growth to peak higher than expected around 4%, and in recent months, has signaled that its concerns over inflation are strong enough to warrant the withdrawal of some support to the UK economy. Earlier this month (8 September), BOE Governor Andrew Bailey, who was speaking in parliament, said that policymakers within the BOE were evenly split at the August meeting on whether there was clear evidence that the economy is eliminating space capacity and achieving the 2% inflation target sustainably. Previously, the BOE had said it would keep policy on hold at least until those conditions had been met.”

“The rate hike debate is definitely heating up. However, we think that with economic growth losing steam and with the uncertain outlook as the spread of the COVID-19 delta variant continues to take a toll, the BOE will not push for immediate tighter policy. That said, we certainly would not rule out an earlier move, though our base case of the first rate hike to come in 2023 remains for now.”