UK inflation expected to remain steady at 10.1%

·Business Reporter, Yahoo Finance UK
·3 min read
Shoppers browse aisles in a supermarket in London
Inflation estimates have been lowered by some analysts due to the government's energy price guarantee. Above, shoppers browse aisles in a supermarket in London. Photo: Neil Hall/Reuters

UK inflation is set to remain at double-digit highs on Wednesday, remaining steady at 10.1% in the 12 months to August, according to Deutsche Bank (DB).

However, this will still put further pressure on households and businesses already struggling with the sharpest cost of living crisis in a century.

Consumer price index (CPI) inflation hit 10.1% in July, while core inflation, which strips out volatile food and energy costs, shot up to 6.2% year-on-year. Headline retail price index (RPI) pushed to 12.3%. All three closely watched prints came in above consensus and market expectations.

It was only the fourth time in 70 years that inflation breached the 10% threshold, the other periods being 1951-52, 1973-77 and 1979-82.

Earlier this week, Deutsche Bank said that it expects inflation to steady in August, staying put at 10.1%, with a peak lower than previously anticipated.

Read more: Aldi overtakes Morrisons as UK’s fourth largest supermarket as food inflation soars

“We see August core CPI pushing higher to 6.4% year-on-year — likely its peak. And we see RPI steadying at 12.3%year-on-year,” it said.

“While energy prices should drag on August inflation, record-breaking food inflation as well as services inflation (mainly from airfares) keep risks to the inflation data to the upside.”

Looking beyond September, the bank has reduced its inflation projections due to the government’s Energy Price Guarantee.

Last week, Liz Truss announced a limit on UK energy bills, with a cap at £2,500 a year to help with soaring energy costs. The government is expected to borrow at least £100bn ($117.3bn) to fund the support package, which is a two-year price guarantee.

Watch: Liz Truss energy plan: £1,000 a year off bills as prime minister announces ‘extraordinary measures’

The move now means a typical household will save an average of £1,000 a year on their energy bills. The £400 payment for all households to help with energy bills will also still go ahead as planned from October.

British businesses and public sector organisations will also see equivalent support over the winter.

“We now see the peak in CPI at just over 10.5% year-on-year, (previously: close to 14%) with our 2023 CPI annual average now 2pp lower at near 7%,” Deutsche Bank said.

“We continue to see second round effects and lingering domestic cost pressures keeping price growth elevated next year before reaching 4% by year end, and staying a little higher for longer in 2024 (CPI: 2.6% y-o-y).”

Prior to the energy cap announcement, the Bank of England (BoE) forecast that inflation was to peak at 14% in the final quarter of this year, before falling to 5% by the end of 2023. It is then expected to drop back to Threadneedle Street’s 2% target by Q4 2024.

Read more: Truss’s energy bills freeze could curb inflation, says Bank of England

The Bank’s monetary policy decision on UK interest rates has been postponed by a week due to the death of Queen Elizabeth. It is now expected to take place on Thursday 22 September.

Mike Coop, chief investment officer at Morningstar Investment Management (EMEA), said: “It is tempting to try to predict inflation, however the complexities of economies and randomness of market shocks make it near impossible to forecast. We don’t have a crystal ball, but for investors, what matters most is inflation over the medium to long term.”

“Investors must not get blindsided by the latest inflation headlines and instead focus on building their portfolios that meet specific needs across a range of economic and market scenarios.

“To maintain a long term vision and avoid short-term shocks, investors must maintain clear goals — whether this is to progressively build wealth or to draw an income from wealth in retirement.”

Watch: How does inflation affect interest rates?