Inflation: is the slowdown over?

New data from the ONS shows that “all items” inflation in August remained stable at 2.2% year-on-year, as measured by the CPI method.

In fact, inflation has been low and fairly stable since spring 2024, with price increases for services (including eating out) continuing to offset price cuts for utilities and motor fuel.

In food and drink, inflation in August was 1.3% year-on-year, suggesting that major inflation reductions in this area have also petered-out.

Inflation in food and drink surprises on the upside – IGD’s food inflation forecast from summer 2024 suggested that rates would be below 1% at this point.

Some price cuts were seen in fish, dairy and processed foods, but prices continued to rise in oils, fats, fruit and vegetables.

Price increases for fruit and vegetables may be associated with weather factors or with problems with imports as new border measures are rolled out.

Border operation remains a hot issue, with important changes for fresh produce planned for January 2025 – the point that the UK is usually most reliant on imports of these goods.

IGD opinion:

Next month’s Economic & Fiscal Outlook report from the Office for Budget Responsibility (OBR) will give some idea of the official view of future inflation.

IGD, however, believes that the downturn in general inflation has now come to an end and that rates will be more stable in future.

However, this more stable future may be impacted should any new shock events emerge. The geo-political situation remains very unstable and may well deliver further price shocks.

With “all items” inflation apparently stable and within the government’s target zone (2.0%, plus or minus 1%), the Monetary Policy Committee must have felt pressure to deliver another interest rate cut when it met this week.

In any case, they chose to delay just a little longer, which was in-line with previous cautious messaging. Persistent inflation in the Services sector remains a concern and an increase in the Energy Price Cap (taking effect in October) may mean that inflation pressure in this area will reassert as winter comes in.

Employers will also be pondering the future of wages, with inflation being one of the key factors. The UK labour market remains tight, with the number of inactive persons a major concern.

However, according to data from the Bank Of England Decision Maker Panel, actual wage growth has slowed since the start of the year and anticipated future wage growth has also fallen. Data remains ahead of inflation, however, leaving workers better off in real terms.

A key determinant of wage growth will be the National Living Wage (NLW), which sets wages for millions of entry-level jobs and also influences wages for other roles.

The government manifesto promised to go on adjusting the NLW, to account for the cost of living, but this undertaking is rather vague and employers will no doubt welcome clarity, as a matter of urgency. The next OBR report may offer more detail.