Inflation ticks downwards as petrol prices ease

The consumer price index fell in August from a year earlier, following a smaller rise in petrol and clothing prices.

CPI inflation fell from 2.8 in July to 2.7 per cent in August, compared with a year earlier. However, food prices inflation rose from 3.9 per cent to 4.1 per cent.

“We continue to think that CPI inflation is likely to fall back to the 2 per cent target within the next few months – a development that would help to ease the squeeze on households’ real earnings and cool fears in the markets that one of the inflation knockouts to the MPC’s forward guidance is likely to be breeched,” Samuel Tombs, UK economist at Capital Economics, said.

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Inflation is monitored by the Bank of England, which is expecting inflation to fall to 2 per cent.

One of the “knockouts” in the Bank’s forward guidance policy is that inflation must not be expected to rise to 2.5 per cent or more in an 18-24 month view. If it does, the Bank will no longer look to raise interest rates when unemployment falls to 7 per cent.