UK inflation falls to lowest level since late 2016
By Abigail Townsend
Date: Wednesday 18 Sep 2019
(Sharecast News) - Inflation has fallen to its lowest level for nearly three years, official data showed on Wednesday, weighed down by volatile computer game prices.
According to the Office for National Statistics, the consumer prices index including owner occupiers' housing costs (CPIH) was 1.7% in August, down on July's figure of 2.0% and the lowest reading since the end of 2016.
The largest downward contributions came from recreational and cultural goods, including a 5% slide in the prices of games, toys and hobbies. Clothing and footwear prices rose 1.8%, considerably below last year's 3.1% increase. The largest upward contribution came from food and beverages.
Stripping out housing costs, CPI was 1.7% compared to 2.1% in July. Economists had been looking for a reading of around 1.9%. Core inflation, which removes volatile elements such as housing and energy, dropped to 1.5% from 1.9%, also below consensus expectations 1.8%.
Mike Hardie, head of inflation at ONS, said: "The inflation rate has fallen noticeably into August, to its lowest since late 2016. This was mainly driven by a decrease in computer game prices, plus clothing prices rising by less than last year after the summer sales."
The pound eased against the dollar following the inflation print, falling 0.5% to $1.2446 by 1000 BST.
David Cheetham, chief market analyst at XTB, said: "This is the lowest core reading since November 2016 and could be seen to raise the chances of a rate cut from the Bank of England. There's been a clear trend among central banks towards lower interest rates in recent months, but the Bank of England has yet to follow suit.
"However, Brexit uncertainty looks like it's here to stay for the foreseeable future and further weakness in inflation metrics in the coming months could see calls for Mark Carny and his fellow rate setters to lower the base rate gain prominence - especially given the anaemic growth figures that have seen the UK flirting with a technical recession."
However, Samuel Tombs, chief UK economist at Pantheon Macroeconomics, argued that the Monetary Policy Committee was unlikely to raise rates this year despite the fall the August inflation rate.
"The 1.7% print actually exceeded the Committee's August Inflation Report forecast of 1.6%" he said. "In addition, half of the sharp fall in the headline rate was driven by further volatility in the price of computer games. A renewed fall in clothing inflation - to 0.9% from 0.4% in July - accounted for a further one-quarter of the decline in the headline rate.
"The path of clothing prices last year was unusually volatile, with prices falling more than usual in June and July, only then to rise in August by the most in 27 years. Clothing inflation now is close to its average rate in the first half of this year, so further wild swings aren't likely."
Looking ahead, Tombs added: "CPI inflation still looks set to rise back to, and then slightly exceed, the 2% target in 2020, ensuring that only a sharp downturn in the economy will prompt the MPC to cut the bank rate again."
Phil Smeaton, chief investment officer at Sanlam UK, said: "Sterling weakness and solid wage growth mean that the upward inflationary pressures persist. However, the uncertain political situation, subdued consumer confidence and the recent contraction in GDP could gift the prime minister a pause in inflation which empowers him to launch a post-Brexit fiscal stimulus.
"In this sense the longer-term outlook for inflation remains well supported, and the UK economy remains poised to accelerate when political certainty is delivered."
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