Consumer prices in Britain rose 9.9 percent in August from a year earlier, a slight easing of the inflation rate and the first decline in nearly a year, signaling that inflation may have reached its peak.
While this sign of a turnaround in the trajectory of inflation is likely to bring some relief to lawmakers and policymakers, it will provide only limited comfort to consumers. With prices rising at the fastest pace in 40 years, households are still feeling the squeeze on their budgets, and the Bank of England will remain under pressure to raise interest rates.
The inflation rate fell from 10.1 percent in July. A decline in the price of motor fuels pulled down the inflation rate, as well as smaller increases in the price of food and clothing.
The inflation rate last declined in September 2021, when the effects of the end of widespread discounting in restaurants the previous summer dropped out of the annual calculations of price changes.
Britain’s inflation rate had been expected to reach 13 percent in October, according to a forecast from the Bank of England last month, and then possibly rise again in January — each time jumping after a rise in the government’s price cap on household energy bills to reflect rising wholesale natural gas prices. But those predictions were made obsolete last week when the newly installed prime minister, Liz Truss, announced that she would freeze energy bills for the next two winters at an average of £2,500 ($2,880) a year.
Ms. Truss said she expected the move to lower the expected inflation rate by as much as 5 percentage points.
Analysts, too, quickly slashed their forecasts. At Investec, analysts said this week that a freeze at the current prices would mean that inflation had peaked at 10.1 percent in July and would fall back to 8.6 percent in January. Besides dampening inflation, the policy is expected to put more money in people’s pockets and lessen the severity of any upcoming recession.
But the policy runs the risk of making high inflation more persistent, even if the overall rate doesn’t go higher. The freeze in energy bills will allow households to set aside less money for gas and electricity, and they might spend it instead on restaurants and travel. This keeps up the pressure on the central bank to restrain the economy with interest rate increases in an effort to stamp out high inflation. The bank targets a 2 percent inflation rate.
Core inflation, a measure of price increases excluding volatile energy and food prices, was 6.3 percent in August, rising slightly from 6.2 percent in July.
What the Bank of England cares about, Huw Pill, the central bank’s chief economist, said earlier last week, is the impact of fiscal policy changes over the medium term, as opposed to any short-term decrease in the main inflation rate.
Economists expect the bank to raise interest rates by another half percentage point when it meets next week. The meeting was postponed by a week, until after the national mourning period for Queen Elizabeth II.