UK inflation rate falls to 2.7% in August

Clothing prices rose more slowly than in 2012, as Richard Campbell from the ONS explains

UK inflation measured by the consumer prices index (CPI) fell to 2.7% in the year to August, from 2.8% in July.

It means prices are still rising faster than wages, which rose by 1.0% on average over the same period.

The Office for National Statistics said the drop was due to air fares, petrol and diesel, and clothing prices rising more slowly than in August 2012.

Inflation as measured by the retail prices index (RPI) rose to 3.3% in August from 3.1% in July.

CPI is important because it is the measure targeted by the Bank of England's interest rate-setters, while the RPI is used for annual adjustments in some benefits and rail fares.

The Bank targets CPI inflation of 2%, but is currently holding off raising interest rates to control inflation because the unemployment rate is too high.

Start Quote

Reduced price pressure provides the monetary policy committee with a little more room to maintain loose policy and support growth”

End Quote Sasha Nugent Caxton FX

Under the Bank's policy of forward guidance, it has said it will not consider raising interest rates until the unemployment rate has fallen to 7% or below.

However, the Bank has said it could choose to raise rates if it thinks inflation will still be above 2.5% in 18 months to two years' time.

'Stubbornly high'

While petrol prices rose by an average of 2p per litre in August, that was still slower than the 3.5p they had risen in August 2012.

There are concerns that the situation in Syria could raise fuel prices in the coming months, reversing the two months of slowing inflation.

"Oil poses a major risk to the inflation outlook, and there remains a very real possibility that price pressure could remain stubbornly high in coming months, especially as the economic recovery gathers momentum, adding to the difficult task faced by policymakers," said Chris Williamson, chief economist at Markit.

However, wholesale fuel prices have fallen since the end of August. The RAC has called on retailers to pass on the 6p a litre fall in wholesale unleaded prices and 2p a litre fall in diesel prices immediately.

'Breathing room'

One of the biggest upward pressures on inflation in August was the household equipment category, including an 18% annual increase in the price of electric fans.

There was also a rise in food price inflation from 3.9% to 4.1%.

The prices of clothing and footwear usually rise between July and August as autumn ranges come into stores.

They rose by 2.0% last month compared with a 2.8% increase in the same month last year.

CPI inflation last stood at 2.7% in May this year.

"Reduced price pressure provides the monetary policy committee with a little more room to maintain loose policy and support growth," said Sasha Nugent, analyst at Caxton FX.

"Carney has gained some breathing room for now, but with the economy picking up, it is unlikely inflation will remain subdued."

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