Digging deeper: Lower energy bills are reducing inflation.
Last year, the Russian invasion of Ukraine caused wholesale energy prices to soar, but price caps on bills in Britain meant households felt these increases with a delay. The same has happened as wholesale prices have dropped this year.
In October, the inflation rate was hit by a drop in household energy costs as the cap, set every three months by the energy regulator, was reduced. The average household bill was set at 1,834 pounds ($2,293) a year, 7 percent less than before. A year ago, Headline inflation peaked at more than 11 percent.t by a jump in household energy costs, even after the government stepped in to subsidize these payments.
Food inflation, which had replaced 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.
While policymakers take comfort from the slowdown in headline inflation, they are closely watching other measures of domestic price pressures to see how persistent inflation might be. These are falling 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 eased to 5.7 percent, slightly below 6.1 percent in September.
Authorities also monitor wage growth, one of the most difficult aspects of inflation. Price growth in the service sector, which is heavily influenced by companies’ wage costs, slowed to 6.6 percent. Data released Tuesday showed wage growth had slowed in the third quarter, but at an annual pace of 7.7 percent, it was still near record highs.
Why it matters: The government is keeping its promise to cut inflation in half.
At the beginning of the year, when inflation was over 10 per cent, 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 in this promise.
But that does not end Britain’s inflation problem. Control of inflation is actually in the hands of the Bank of England authorities, who are mandated to return inflation sustainably to 2 percent.
Huw Pill, the central bank’s chief economist, said on Tuesday there had been “significant” progress in reducing inflation, but it was still too high, so authorities had “some work to do.”
At an event in Bristol, Pill warned that on some underlying measures of inflation the news was “frankly not that good”. For example, wage growth is too rapid to be consistent with 2 percent inflation.
What happens next: Interest rates are expected to remain at the highest level in 15 years.
Inflation is expected to fall further, 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 sure that inflation will definitively return to its objective. Bank officials have kept rates at the highest level since 2008 during their last two meetings, after raising them from near zero starting in late 2021.
The impact of these past rate increases is expected to deepen and further moderate inflationary pressures. Over the next year and a half, the British economy is expected to stabilize, according to the central bank.
But there are risks that inflation will prove more persistent than expected or that the conflict in the Middle East will cause a rise in energy prices that reignites price pressures.