The UK’s annual inflation rate was 0% in August for the fourth time this year, down from 0.1% last month. A drag from consumer prices for transport was offset by contributions from those for furniture and household goods, and food and non-alcoholic beverages. The weakness of transport prices highlights that the price of Brent crude oil – the European benchmark –was on a downward trend at below $50 per barrel for most of August. In contrast, the contribution from the prices of furniture and household goods suggests that the relatively low unemployment rate and stronger wage growth supported domestic demand-driven inflation pressures.
The inflation rate is likely to remain weak in the next month or two. After briefly surging in late August, the oil price is now back below $50 per barrel. Also, factory gate producer prices – a forward indicator of consumer prices – fell in August by the most since January.
Inflation remains in line with the Bank of England’s forecasts. Policymakers reiterated earlier this month that they expect inflation to remain close to zero for a few more months before picking up at around the turn over the year. Also, they restated the BoE remains focused on the impact of demand-pull pressures and movements in the exchange rate in the medium-term, that is, in two years’ time. The BoE targets an annual inflation rate of 2% in the medium term.
The central bankers have said a number of times that they are likely to think about starting to raise interest rates at the turn of the year. August’s inflation print shouldn’t change their view. Instead, policymakers are likely paying close attention to the potential impacts on domestic demand and the exchange rate from China’s slowdown, and whether the US Federal Reserve starts to increase interest rates this month.