The UK’s inflation rate is expected to dip slightly when official statistics are published by the ONS tomorrow, as markets look for signs that the Bank of England’s interest rates have already peaked.
City experts expect the headline inflation rate to dip to 6.6%, the lowest rate since February 2022, when Russia invaded Ukraine.
However, economists cautioned against celebrating another decline in the rate of price rises, as the latest developments in Israel and Palestine could send the price of oil soaring, which would have knock-on effects for inflation in the UK.
Professor of global economy at the Cranfield School of Management Joe Nellis said: “As energy and food prices continue to drop from their all-time highs, consumer price inflation is expected to fall again this week and we could see it head closer to 6% on Wednesday. This brings the Prime Minister’s end-of-year inflation aspiration of 5% in sight, but events in the Middle East and Ukraine could easily change the outlook.”
It comes as the Bank of England’s Monetary Policy Committee prepares to make its latest decision on interest rates at the start of next month, with markets hoping that rates have peaked. The Bank took the decision to pause its rate hikes last month after 14 consecutive rises, though it left the door open to a further increase. Hopes that rates may have peaked were boosted earlier today, when wage growth slowed slightly in the three months to August.
Nellis said: “The long-term forecast is for inflation to edge towards the Bank of England’s target of 2%. But to achieve this, the Bank of England is likely to keep its foot on the brake, applying interest rate pressure and squeezing the economy as it continues to sail close to the wind. This means interest rates will remain at around 5% for some months ahead and we’re unlikely to see the return of cheap borrowing for the foreseeable future.”
The Bank may pay closer attention to core inflation, which strips out food and energy prices in order to create a less volatile picture of the long-term trend of where prices are going. That figure is expected to dip further to 6.2% after a shock fall to 6.2% in August.
Currently, City markets see a more than three-in-four chance that the Bank will keep interest rates where they are again next month. They see the question of whether rates have peaked as a roughly 50/50 shot, though cuts are not expected until the middle of next year.
Economists’ estimates of inflation have often missed the target, with inflation repeatedly coming in ahead of expectations for most of the first half of this year, before coming in below expectations in recent months.
Matthew Ryan, Head of Market Strategy at global financial services firm Ebury, said that if inflation is higher than expected, that could lead to drastic changes in expected interest rates.
“Market pricing of the terminal rate in the UK has shifted dramatically on the assumption that a disinflationary trend is now firmly in place,” he said. “Any disappointment on this score, particularly as regards to core inflation, could lead to a sharp repricing of future Bank of England moves and buoy the pound.”
