British inflation slows to 4.6 percent, the lowest in two years
Digging deeper: Lower energy bills push inflation down.
Last year, Russia’s invasion of Ukraine caused wholesale energy prices to soar, but price caps on bills in Britain meant that households saw these increases with a delay. The same is true now that wholesale prices have fallen this year.
In October, inflation was brought down by a drop in household energy costs as the cap, set every three months by the energy regulator, was lowered. The average household bill was set at 1,834 pounds ($2,293) per year, 7 percent lower than before. A year ago, headline inflation peaked at more than 11 percent due to a rise in household energy costs, even after the government stepped in to subsidize these payments.
Food inflation, which had taken over from energy as the main driver of inflation in recent months, also slowed in October. Food prices rose 10.1 percent, the slowest pace since June 2022.
Even as policymakers take comfort in slowing headline inflation, they are carefully watching other measures of domestic price pressures to see how persistent inflation might be. These decline more slowly. For example, officials look at core inflation, a measure that excludes food and energy prices because they can be volatile and heavily influenced by international financial markets. Last month, core inflation fell to 5.7 percent, slightly down from 6.1 percent in September.
Policymakers are also keeping an eye on wage growth, one of the trickiest aspects of inflation. Price growth in the services sector, which is strongly influenced by corporate wage costs, slowed to 6.6 percent. Data released Tuesday showed wage growth had slowed in the third quarter but was still near historic highs at an annual pace of 7.7 percent.
Why it matters: The government is delivering on its promise to halve inflation.
At the start of the year, as inflation exceeded 10 percent, Prime Minister Rishi Sunak promised to halve inflation in Britain by the end of the year. After Wednesday’s data was released, he claimed victory on this promise.
But that does not solve the British inflation problem. Controlling inflation is effectively in the hands of the Bank of England’s policymakers, who have the mandate to sustainably reduce inflation to 2 percent.
Huw Pill, the central bank’s chief economist, said on Tuesday that “significant” progress had been made in reducing inflation, but it was still too high so policymakers had “some work to do”.
Speaking in Bristol, Mr Pill warned that the news was “frankly not that good” based on some underlying inflation measures. For example, wage growth is too fast to be consistent with 2 percent inflation.
What happens next: Interest rates are expected to remain at their highest levels for the next fifteen years.
Inflation is expected to continue to fall, to around 3.4 percent by the end of next year, but Bank of England officials have said they will keep interest rates high until they are confident inflation will definitively return to target levels . The bank’s policymakers have kept interest rates at their highest level since 2008 at the past two meetings, after raising them from near zero from late 2021.
The impact of these past rate hikes is expected to deepen and further dampen inflationary pressures. The British economy is expected to level off over the next year and a half, according to the central bank.
But there are risks that inflation proves to be more persistent than expected, or that conflicts in the Middle East cause energy prices to rise, reigniting price pressures.