UK Inflation Cooled Down Some, Though It’s Still Quite Steamy

UK Inflation Cooled Down Some, Though It’s Still Quite Steamy
Paul Allison, CFA

5 months ago2 mins

Mentioned in story

What’s going on here?

The UK flouted economists’ assumptions, with inflation flagging in August.

What does this mean?

Inflation-watching isn’t an edge-of-your-seat pastime these days, and the world’s all-too-predictable prices mean that economics enthusiasts only truly light up when a piece of out-of-the-blue data drops. That’s why Wednesday’s British consumer price index reading was such a blessing for macroeconomic anoraks: prices rose by 6.7% in August from the same time last year (or 6.2% stripping out volatile food and energy) – in short, by much less than expected. And sure, that figure’s still higher than it would be in an ideal world, but it’s a massive step in the right direction.

UK inflation
Source: Office for National Statistics

Why should I care?

Zooming out: Cool Britannia.

Up until now, pundits and economic forecasters have taken Old Blighty as a kind of punching bag – bemoaning Britain’s unproductive workforce, political disarray, and Brexit woes. But economic narratives can turn on a dime, so you can expect some chirpier outlooks after this latest inflation reading. After all, the Bank of England was slower than its US counterparts when it came to jacking up interest rates, so it only stands to reason that it’s taken longer for inflation to cool.

UK inflation vs peers
Source: Office for National Statistics

For markets: Building expectations.

If the UK is indeed on the same path as its pal across the pond, then you can expect whisperings about interest rate cuts at some point next year. And you don’t need to be a budding Oppenheimer to work out that lower rates might result in cheaper mortgages – which might, in turn, equal stronger demand for housing. Just take a look at the States: rate-cut hopes have seen a key homebuilding ETF jump more than 30% this year. It’s no surprise, then, that UK builders' stock prices also leaped when these inflation figures emerged.

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