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Dig deeper: Lower energy bills are driving down inflation.
Last year, Russia’s invasion of Ukraine raised wholesale energy prices, but price caps on bills in the UK meant households realized these rises with a lag. The same is true as wholesale prices have declined this year.
In October, inflation rates were driven down by falling household energy costs as the energy regulator eased the cap set every three months. The average household bill was set at £1,834 ($2,293) a year, 7 percent lower than before. A year ago, overall inflation peaked at more than 11 percent due to a surge in household energy costs, even after the government intervened to subsidize these payments.
Food inflation, which had overtaken 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.
Even as policymakers take solace from the decline in headline inflation, they are keeping a close eye on other measures of domestic price pressures to gauge how persistent inflation may persist. These are falling more slowly. For example, officials look at core inflation, a measure that does not include food and energy prices because they can be volatile and heavily influenced by international financial markets. Last month, core inflation eased slightly to 5.7 percent from 6.1 percent in September.
Policymakers also track wage growth, one of the more difficult aspects of inflation. Value growth in the services sector, which is heavily influenced by companies’ wage costs, slowed to 6.6 percent. Data published Tuesday showed that wage growth had slowed in the third quarter, but at a 7.7 percent annual pace, it was still close to historic highs.
Why it matters: The government keeps its promise to halve inflation.
At the beginning of the year, when inflation exceeded 10 percent, Prime Minister Rishi Sunak promised to halve inflation in Britain by the end of the year. After the release of Wednesday’s figures he claimed victory On this promise.
But this does not end Britain’s inflation problem. Controlling inflation is actually in the hands of Bank of England policymakers, who are mandated to return inflation to 2 percent permanently.
The central bank’s chief economist Hugh Pill said on Tuesday that “significant” progress has been made in reducing inflation, but it is still very high, so policymakers “have some work to do.”
Speaking at an event in Bristol, Mr Pill warned that the news on some underlying measures of inflation was “clearly not so good.” For example, salary increases are too fast to keep up with 2 percent inflation.
What’s next: Interest rates are expected to be at their highest level in 15 years.
Inflation is expected to continue falling to about 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 confident inflation will return to target . The bank’s policymakers kept rates at their highest level since 2008 at their last two meetings after raising them from near zero at the end of 2021.
The impact of these previous rate increases is expected to be profound and further reduce inflation pressures. According to the central bank, the British economy is expected to stabilize over the next year and a half.
But there are risks that inflation remains more persistent than expected or that the conflict in the Middle East leads to increases in energy prices that revive price pressures.
