Inflation is down and consumer power is up. Could interest rates rise too? » SMEInsider

Inflation is down and consumer power is up. Could interest rates rise too?

1950s shoppers

Supermarket price wars helped to push down the annual rate of UK inflation last month, according to the Office for National Statistics, with the cost of food, non-alcoholic drinks and petrol all in decline.

Figures show that Consumer Price Index (CPI) inflation dropped 0.1% to 1.5% in August, well below the Bank of England’s target maximum of 2%. This will ease pressure on the bank as it considers whether to loosen its grip on the 0.5% interest rate held for the past 5 years, allowing interest rates for borrowing to creep up to normal levels.

Retail Price Index (RPI) inflation also saw a reduction of 0.1%, falling to 2.4%, whilst food prices of food dropped by 1.1% – the sharpest decline in a decade. Core inflation, however, which disregards food, alcohol, tobacco and energy, rose by 1.9%.

Howard Archer, Chief UK and European Economist at IHS Global Insight, said“August’s muted consumer price inflation is welcome news for consumers’ purchasing power as they currently continue to be hampered by very low earnings growth. Indeed, even consumer price inflation of 1.5% in August is still more than double current underlying earnings growth.”