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Inflation falls to 6.7%. Could a base rate rise be called off?

Rebecca Goodman
Written By:
Rebecca Goodman

In a surprise drop, the rate of inflation fell to 6.7% in August, from 6.8% in July, according to official figures.

Slowing food prices were the biggest contributor to the decrease along with accommodation costs.

Specifically, the inflation rate for milk, cheese, and eggs fell to 15.3%, down from 18.7% in July, while the rate for vegetables fell to 14%, from 16.7% in July, according to the Office for National Statistics (ONS).

Rising fuel prices made the biggest impact to the figure, although this is now the third month in a row it has fallen.

Yet while the rate has fallen a long way from its peak of 11.1% last October, it’s still a lot higher than the Government’s 2% target and while it is falling, this doesn’t mean things are getting cheaper just that they are rising at a slower rate.

Food inflation still at 13.6%

Food and non-alcoholic drink prices rose by 0.3% between July and August, compared to a rise of 1.5% a year ago. The annual rate of inflation for these areas rose to 13.6% in August, down from 14.9% in July and a high of 19.2% in March 2023 – the highest level seen for 45 years.

The annual rate for restaurant and hotel inflation was 8.3%, down from 9.6% in July, the lowest level seen since May 2022.

Core inflation, which excludes energy, food, alcohol and tobacco rose by 5.9% in the 12 months to August, down from 6.4% in July.

This is one of the measures the Bank of England (BoE) focusses on when deciding what to do with the base rate.

It is meeting tomorrow and it had been predicted that it would will raise rates again, to 5.5%. But now core inflation has fallen there are questions over if it will raise rates at all. Experts largely agree that the rate rise will happen tomorrow but there is now less certainty that it will happen.

Significant falls ramp up the likelihood of holding rates

Ben Thompson, deputy CEO at Mortgage Advice Bureau, said: “Another fall in inflation will fill the nation’s mortgage holders with hope that the tide has well and truly turned.

“Significant month-on-month falls ramp up the likelihood that the Bank of England will hold off on increasing rates right now. This will likely be a breath of fresh air for those on variable rates or trackers, especially if this means that interest rates are near, or at, their peak.

“There is better news for those looking to remortgage and, indeed, prospective buyers. This is due to the steady decline of swap rates, meaning many lenders have reduced rates on various deals. Although swap rates remain high in comparison to the past decade, they are some of the lowest rates we’ve seen in the past year.”

‘Unlikely to change forecasts’

However, other felt that, despite the drop, another rise was inevitable.

“The fall in inflation is unlikely to change forecasts that the Bank of England will raise rates 0.25% tomorrow, and that rate hikes may be coming to an end,” said Sarah Coles, head of personal finance for Hargreaves Lansdown.

Coles added: “Relief has surged as inflation fell, defying predictions of a small bump, as lower food inflation helped us digest rises in petrol prices.

“It’s also likely to make tomorrow’s news from the Bank of England slightly sweeter, which in turn could make anyone facing a remortgage in the near future feel less like they’ve bitten off more than they can chew.”

‘May well be the last increase for a while’

Myron Jobson, senior personal finance analyst for interactive investor, said: “Core inflation, the pared down measure, which excludes volatile food and energy prices, fell to 6.2%, from 6.9% in July, a faster decline than anticipated and below the headline rate.

“This reading matters because Bank of England policymakers monitor it to get a sense of inflation’s momentum. It means that the widely-touted rise in interest rates tomorrow may well be the last increase for a while – if it happens at all.

“Prices are heading in the right direction, but it’d be premature to declare victory over inflation. The road to rein in inflation remains an uncertain one.”

‘Too soon to put the brakes on interest rate hikes’

Alice Haine, personal finance analyst at Bestinvest, said: “While easing inflation is positive for the Bank of England as it means its strategy is working, it may be too soon to put the brakes on interest rate hikes just yet if it really wants to tame persistent inflation for good and bring it closer to its target of 2%.

“Instead, the central bank is widely expected to push ahead with a 25 basis-point hike at its Monetary Policy Committee meeting on Thursday as it looks to win the battle against stubbornly high inflation – even if this risks sending the UK economy into a mild recession.

“Speculation has been building that Thursday will be the last rate hike of the current cycle, with the BoE holding at 5.5% for the foreseeable future as the drag on the economy from its cycle of interest rate rises takes its toll.”