UK Expects End of Tightening... "Inflation Has Peaked"

As inflation that has plagued the UK economy shows signs of easing, expectations are growing that the UK will enter the end phase of its tightening cycle.

On the 29th (local time), Bloomberg reported that the UK Retail Consortium (BRC) August retail price index fell sharply to 6.9% from 7.6% in the previous month. It appears that the decline was led by food prices, which had been the main driver of inflation in the UK. Bloomberg analyzed, "Prices of food items such as meat, potatoes, and cooking oil have dropped significantly," and noted that the slowdown in food price increases is easing the cost-of-living pressure on households. The BRC index peaked at 9.0% in May and has since shown a downward stabilization trend.

The decline in the BRC index is interpreted as a signal that food prices, the main culprit of UK inflation, have "passed their peak." Earlier this year, food prices surged at the fastest pace in 46 years, pushing the Consumer Price Index (CPI) to maintain double-digit high levels. The UK CPI peaked at 11.1% in November last year and maintained a rise in the 10% range until April this year, making price stabilization difficult. After sharply dropping to 8.7% in May and June, it further fell to 7.9% in July and 6.8% in August.

Improved inflation indicators have increased expectations for the end of tightening within the year. The market expects two more rate hikes this year, including a 0.25 percentage point increase at the September monetary policy meeting. The current interest rate of 5.25% is the highest level in 16 years since the global financial crisis in 2008. The Bank of England (BOE) began tightening first among major European countries in December 2021 and has continued tightening without a break for nearly 1 year and 9 months. At that time, the interest rate was at a record low of 0.1%.

[Image source=AFP Yonhap News]

The UK government is optimistic about the inflation outlook. Ben Broadbent, Deputy Governor of the BOE, forecasted that "UK inflation will continue to decline over the next few months" and that "the living standards of the British people will begin to improve." His remarks came after the 'Jackson Hole Meeting' held from the 24th to 26th, where Jerome Powell, Chair of the US Federal Reserve (Fed), and Christine Lagarde, President of the European Central Bank (ECB), said the fight against inflation is not over yet. Inflation rates in the US and Eurozone have fallen to 3.2% and 5.3%, respectively, which are significantly lower than the UK.

The market expects the UK’s terminal interest rate to reach 5.75%. Bloomberg reported, "Although the inflation rate has dropped from its peak (11.1%) to 6.8%, it is still more than three times the target (2%)," and added, "It is expected that the BOE will raise rates by at least another 0.5 percentage points before declaring victory over inflation."

This content was produced with the assistance of AI translation services.