Inflation falls back to zero as falling fuel prices and a smaller rise in clothes prices than last year pushed inflation down to zero from an already meagre level.
As expected by the majority of economists, UK consumer prices were flat in the year to August, having increased by 0.1 percent in the year to July. The Bank of England expects inflation to remain around zero well into the autumn before climbing slowly. Core inflation, which strips out volatile components like food and energy, fell to 1.0 percent. Last month’s jump from 0.8 percent to 1.2 percent had prompted suggestions that underlying inflationary pressures could be building, but today’s drop could provide the Bank with some breathing space to leave interest rates on hold for longer in the face of global concerns.
With domestic growth and the labour market recovery looking healthy, if unspectacular, some policymakers are increasingly considering that higher rates are appropriate. Rate-setter Martin Weale said last week that rates would have to rise “relatively soon”, and another MPC member Kristin Forbes has also said they will probably rise in the near future. Both voted to leave rates on hold at this month’s meeting, but their rhetoric suggests they might soon join Ian McCafferty in voting for a rise of 25 basis points. On balance I believe the Bank will wait until at least next spring before acting. Tomorrow sees the release of UK labour market statistics, ahead of the week’s main event – the US Federal Reserve’s eagerly anticipated interest rate decision on Thursday.
