Good news for Brits as inflation falls to lowest rate since 2016

Oscar Williams-Grut
Senior City Correspondent, Yahoo Finance UK
Latest inflation data shows that shoppers can buy slightly more for a pound now. Photo: Suzanne Plunkett/Reuters

Brits have got more money in their pockets as new figures show inflation slowed more than expected in August.

New figures released by the Office of National Statistics (ONS) on Wednesday show that prices rose by 1.7% in August. That was below economists’ forecast of 1.9% and represents a big slowdown from July’s inflation figure of 2.1%.

The lower-than-forecast price rises come at a time when UK workers are enjoying their fastest pay rises in more than a decade, meaning more money in their pockets.

Chancellor Sajid Javid said: “Low inflation and high wage growth means people’s hard-earned cash is going further, helping them to provide for their families.”

The ONS said the falling inflation rate was down to cheaper toys, games, clothing, and sea fares. Air fares rose in the month, but not enough to counter the falling prices elsewhere.

“The inflation rate has fallen noticeably in August, to its lowest rate since late 2016,” Mike Hardie, head of inflation at the ONS, said. “This was driven mainly by a decrease in computer game prices, plus clothing prices rising by less than last year after the end of the summer sales.

“Annual growth in house prices slowed to its lowest rate since September 2012, with four of the nine English regions now seeing prices falling over the year.”

Wage growth is now far outpacing rising prices. The latest wage growth data showed pay including bonuses increase by 4% in July, or 3.8% excluding bonuses.

The greater-than-expected slowdown comes despite the collapse in the value of the pound in August, which should make imports more expensive. Sterling dropped from $1.24 to below $1.21 when Boris Johnson became prime minister.

Pound falls as rate hike looks unlikely

The inflation slowdown is also good news for the Bank of England, which targets price rises of 2%.

The central bank will deliver its latest interest rate decision on Thursday. The pound fell against both the euro and the dollar after the ONS data, as traders bet that the weak inflation rate makes the Bank of England unlikely to raise interest rates.

Sterling fell against the dollar when inflation data was published at 9.30am. Photo: Yahoo Finance UK

“This was the last important piece of information for BOE ahead of their monetary policy decision,” Naeem Aslam, chief market analyst at ThinkMarkets, said. “We expect the bank to be more focused on Brexit than anything else, and it is highly likely that Mark Carney’s term at the bank may be extended even further because of the strong possibility of a general election.”

The pound was down 0.2% against the euro at €1.1262 (GBPEUR=X) and down 0.4% against the dollar to $1.2441 (GBPUSD=X) shortly after the ONS announcement.