Dig deeper: Lower energy bills lead to lower inflation.
Last year, Russia’s invasion of Ukraine sent wholesale energy prices soaring, but a cap on bill prices in Britain meant households felt these increases too late. The same applies to wholesale prices, which have fallen this year.
In October, inflation fell due to lower household energy costs, as the cap – set by the Energy Regulatory Authority every three months – was lowered. The average household bill was set at 1,834 pounds ($2,293) per year, 7 percent lower than before. A year ago, overall inflation peaked at more than 11% due to a jump in household energy costs, even after the government intervened to support these payments.
Food inflation, which has replaced energy as the main driver of inflation in recent months, also slowed in October. Food prices rose 10.1 percent, the slowest pace since June 2022.
Even as policymakers take comfort in the slowdown in overall inflation, they are carefully monitoring other measures of domestic price pressures to see how persistent inflation is. These fall more slowly. For example, officials look at core inflation, a measure that excludes food and energy prices because they can be volatile and are heavily influenced by international financial markets. Last month, core inflation fell to 5.7%, down slightly from 6.1% in September.
Policymakers also track wage growth, one of the trickier aspects of inflation. Price growth in the services sector, which is strongly affected by corporate wage costs, slowed to 6.6 percent. Data published on Tuesday showed that wage growth slowed in the third quarter, but at an annual pace of 7.7 percent, still near historical highs.
Why it matters: The government is keeping its promise to cut inflation in half.
At the beginning of the year, when inflation exceeded 10%, Prime Minister Rishi Sunak pledged to halve inflation in Britain by the end of the year. After the release of data on Wednesday. He claimed victory On this promise.
But this does not end the inflation problem in Britain. Control of inflation actually lies in the hands of policymakers at the Bank of England, who are mandated to return inflation sustainably to 2%.
Hugh Bell, the central bank’s chief economist, said on Tuesday that “significant” progress had been made in lowering inflation, but it was still too high, so policymakers had “some work to do.”
Speaking at an event in Bristol, Bell warned that the news on some key inflation measures was “frankly not good”. For example, wage growth is too fast to keep up with the inflation rate of 2%.
What happens next: Interest rates are expected to remain at their highest level in 15 years.
Inflation is expected to continue to fall to about 3.4 percent by the end of next year, but Bank of England officials have said they will keep interest rates high until they are sure inflation is back on target. Bank policymakers kept interest rates at the highest level since 2008 in their last two meetings, after raising them from near zero starting in late 2021.
The impact of these previous interest rate increases is expected to exacerbate and further mitigate inflationary pressures. Over the next year and a half, the British economy is expected to stabilize, according to the central bank.
But there are risks that inflation will prove firmer than expected, or that conflict in the Middle East will cause energy prices to rise, leading to price pressures.