The CPI inflation rate decelerated again in August extending its run to 8 consecutive months below the BoE target of 2.0%. The CPI rate came in at 1.5%, down from 1.6% in July.
Inflation was kept at bay by a combination of factors weighing down on business costs, such as cheap imports from a strong sterling, weak wage growth and lower energy prices. About three quarters of the downward pressure on prices is accounted by falls in the prices of motor fuels (-5.7% on year) and food & non-alcoholic drinks (-1.1% on year).
On the other hand, a quarter of inflation came from a 3.2% on year increase in the price of housing, water, electricity, gas and other fuels. The end of summer retail sales also signalled a 2% increase in the price of clothing & footwear, while transport costs increased 1.2%.
How does it affect interest rates?
It appears that there is enough spare capacity in the economy to support low inflation well into 2015. This should once more relieve pressure from the BoE to hike interest rates, which according to the Governor’s latest speech should now happen next spring. A benign inflation outlook allows the BoE to continue focusing on other indicators such as productivity as well as smoothing out the hikes with incremental increases.
What about manufacturers?
For manufacturers, low inflation is reflected in declining prices for production inputs (PPI). The overall price of materials and fuels bought by UK manufacturers for processing fell 7.2% in the year to August, the second highest rate of deflation since September 2009. Most of the decrease comes from large falls in the price of fuel and crude oil as well as from declining import costs partly driven by persisting deflation in the Eurozone.
Deflation in input prices had a bearing on manufacturing output prices, which also fell by 0.3% on year. Positive contributions from clothing, textiles & leather products and tobacco & alcohol products were offset by large decreases in the prices of petroleum and food products, declining by 7.1% and 2.2% on year respectively.