Press release

20 Sep 2023 London, GB

Big downside inflation surprise will put pressure on MPC to pause – EY ITEM Club comments

Given a rise in petrol prices and an increase in alcohol duties in August, headline Consumer Price Index (CPI) inflation had been uniformly expected to rise that month. But the CPI measure unexpectedly fell to 6.7%.

Press contact
James White

Senior Executive, Media Relations, Ernst & Young LLP

Communications professional experienced in public relations, journalism and media relations. Aston Villa supporter. Passionate about sports and automotive. Former sports journalist.

Related topics Growth
  • Given a rise in petrol prices and an increase in alcohol duties in August, headline Consumer Price Index (CPI) inflation had been uniformly expected to rise that month. But the CPI measure unexpectedly fell to 6.7%. And significant declines in core and services inflation suggest that underlying inflation is on the turn.    
  • Given the role played by volatile categories in pushing down inflation in August, a cautious Monetary Policy Committee (MPC) may want to see more sustained evidence that inflation is on the turn before judging that monetary policy has been tightened enough. Moreover, pay growth has remained very strong and the recent increase in oil prices, if it persists, risks slowing the pace at which inflation falls.
  • But with services inflation now undershooting the Bank of England’s forecast, cracks developing in the labour market and more evidence of disinflationary pressures, including from the latest producer prices numbers, the EY ITEM Club thinks there’s a good chance that the MPC will hold off from another rate rise tomorrow and that the peak in interest rates has potentially already been reached.

Martin Beck, Chief Economic Advisor to the EY ITEM Club, says: “A rise in petrol prices between July and August this year, versus a fall in the same period in 2022, and an increase in alcohol duties meant that forecasters had uniformly expected CPI inflation in August to break what had been a downward trend since early 2023. But the latest data delivered a significant downside surprise, with the CPI measure falling to 6.7% from 6.8% in July, versus consensus and Bank of England predictions of a rise to 7.1%.

“Slowdowns in price growth in some volatile parts of the consumer spending basket, such as accommodation services and air fares, contributed to the decline. But there was also evidence of underlying softness. Core inflation, which excludes the volatile food and fuel categories, and services inflation, which the MPC has focused on as an indicator of domestically-generated prices pressures, both saw significant slowdowns. Core inflation fell to 6.2% from 6.9% in July, while the services measure slipped to 6.8% from 7.4%, substantially undershooting the Bank of England’s forecast of 7.2%.

“Signs that an inflexion point has been reached in underlying inflation, combined with evidence of declining activity and a weakening jobs market, mean the odds of another rise in interest rates this month now seem much lower than only a few weeks ago. What’s more, the latest producer prices data, also published this morning, added to evidence from other leading indicators that downward pressure on inflation will persist. The price manufacturers paid for raw materials and other inputs remained in deflation in August, falling 2.3% year-on-year. And factory gate prices fell 0.4% on 12 months earlier, following the previous month’s 0.7% decline.

“The EY ITEM Club now thinks there’s a good chance the MPC will pause on Thursday. For sure, a cautious committee may want to see more sustained signs that underlying inflation is on the turn, while the committee’s worries about the inflationary impact of strong pay growth won’t have been assuaged by the latest data on that front. The recent increase in oil prices also risks slowing inflation’s descent. But the case that interest rate rises have now gone far enough is looking increasingly convincing and the MPC could present a decision to hold fire as ‘wait-and-see’ rather than a definitive end to rate rises.”