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The annual U.K. inflation slowed down sharply in August. The headline consumer price inflation eased to 1.7 percent from July’s 2.1 percent, the slowest since December 2016. The outturn was slightly below expectations, with consensus expectations centred on a fall to 1.9 percent. Most of the downside surprise was because of weakness in price for a number of ‘core’ areas of the inflation basket, especially clothing and recreation item such as computer games.
Prices of clothing and footwear usually rise in August; however, the 1.8 percent monthly rise in 2019 was much lower than the 3.1 percent rise seen in August of last year, which the ONS attributed to the hangover of the summer sales season. In the meantime, the biggest downward influence came from recreation items, where prices dropped 5 percent last month, relative to a fall of 0.1 percent in August 2018. The annual rate of ‘core’ CPI inflation also eased back, dropping from 1.9 percent to 1.5 percent.
Inflation measured by CPIH also surprised to the downside, easing to 1.7 percent from 2 percent. Nevertheless, relative to the fall in CPI, the decline in the RPI was smaller, edging lower by 0.2 percentage points from 2.8 percent to 2.6 percent. This was mainly because of several areas that recorded sharp price movements last month having different weights in the RPI and CPI baskets.
“While it is highly feasible that some of weakness in today’s report may unwind next month, which is usually the case with sharp moves in volatile items, the near-term outlook for UK inflation remains consistent with CPI holding below 2%, particularly with electricity and gas prices set to fall in October (due to Ofgem’s energy price cut). However, beyond that, the medium-term outlook is still consistent with inflation moving back to (and most likely staying above) target, particularly with disappointing productivity and an acceleration in wage growth likely to continue placing increasing pressure on corporate profit margins” said Lloyds Bank.