In a welcome relief from persistent inflationary pressures, the inflation rate in Britain slowed last month, marking its lowest level in two years. The Office for National Statistics reported that consumer prices rose by 4.6 percent in October from a year earlier, down from 6.7 percent in the previous month.
Last year, Russia’s invasion of Ukraine led to a surge in wholesale energy prices, impacting households with a lag due to price caps on bills in Britain. Similarly, as wholesale prices dropped this year, households experienced a delayed response.
In October, the inflation rate saw a decline due to a drop in household energy costs as the energy regulator lowered the cap, set every three months. The average household bill was reduced to £1,834 ($2,293) per year, a 7 percent decrease. A year ago, overall inflation had peaked at over 11 percent, primarily driven by a surge in household energy costs, even after government intervention to subsidize these payments.
Food inflation, which had recently overtaken energy as the primary driver of inflation, also slowed in October. Food prices rose by 10.1 percent, the slowest pace since June 2022.
While policymakers find comfort in the deceleration of headline inflation, they closely monitor other measures of domestic price pressures to gauge the persistence of inflation. These measures are falling more slowly. Core inflation, which excludes food and energy prices, eased to 5.7 percent last month, slightly down from 6.1 percent in September.
Wage growth, a key aspect of inflation, is also under scrutiny. Price growth in the services sector, influenced by companies’ wage costs, slowed to 6.6 percent. Recent data showed that wage growth had slowed in the third quarter, but at an annual pace of 7.7 percent, it remains near historical highs.
Earlier this year, when inflation exceeded 10 percent, Prime Minister Rishi Sunak pledged to halve inflation in Britain by the year’s end. Following Wednesday’s data release, he claimed success in fulfilling this promise.
However, the responsibility for controlling inflation lies with Bank of England policymakers mandated to sustainably return inflation to 2 percent. Huw Pill, the central bank’s chief economist, acknowledged “significant” progress in lowering inflation but emphasized the need for further work as inflation remains too high. Pill highlighted concerns in some underlying inflation measures, such as pay growth, which is too fast to align with a 2 percent inflation target.
While inflation is projected to continue falling, reaching around 3.4 percent by the end of next year, Bank of England officials emphasize their commitment to maintaining high-interest rates until they are confident about a definitive return to the inflation target. The central bank’s policymakers have kept rates at their highest level since 2008 for the past two meetings after initiating increases from near zero in late 2021.
The anticipated impact of past rate hikes is expected to deepen, further suppressing inflationary pressures. Over the next year and a half, the British economy is forecasted to stagnate, according to the central bank. However, risks remain, such as the potential for inflation to persist longer than expected or Middle East conflicts causing a surge in energy prices, reigniting price pressures.