UK Anticipates End of Tightening... "Inflation Has Peaked" (Summary)

"Global Food Prices as a Variable"

As inflation that has plagued the UK economy shows signs of easing, expectations are growing that the UK will enter a cycle of ending monetary tightening.

On the 29th (local time), Bloomberg reported that the UK Retail Consortium (BRC) retail price index for August 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 also 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 behind UK inflation, have "passed their peak." Earlier this year, food prices surged at the fastest rate in 46 years, pushing the Consumer Price Index (CPI) into double-digit territory. The UK CPI peaked at 11.1% in November last year and maintained a double-digit increase rate until April this year, making price stabilization difficult. After sharply dropping to 8.7% in May and June, it further declined to 7.9% in July and 6.8% in August.

Improved inflation indicators have increased expectations for an end to monetary tightening within the year. The market expects two more interest 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 monetary policy in December 2021, the earliest among major European countries, 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 Jerome Powell, Chair of the US Federal Reserve (Fed), and Christine Lagarde, President of the European Central Bank (ECB), stated at the Jackson Hole Meeting held from the 24th to 26th that the fight against inflation is not yet over. Inflation rates in the US and Eurozone have fallen to 3.2% and 5.3%, respectively, significantly lower than the UK.

Bloomberg evaluated that "as food prices fall to their lowest level in a year, the pressure on the BOE to continue raising interest rates is also easing." The market expects the UK’s terminal interest rate to reach 5.75%. Bloomberg added, "Although the inflation rate has dropped from its peak of 11.1% to 6.8%, it is still more than three times the target rate of 2%, and at least a 0.5 percentage point rate hike is expected before the BOE declares victory over inflation."

However, rising global food prices remain a variable. According to the United Nations Food and Agriculture Organization (FAO), the global food price index rose 1.3% last month compared to the previous month. International wheat prices increased by 1.6% for the first time since December last year, and the rice price index jumped 2.8%, marking the largest increase since September 2011. Helen Dickinson, CEO of the BRC, pointed out that "the suspension of Russia’s Black Sea grain agreement and crop damage caused by the heatwave in Europe could be potential obstacles to easing inflation."

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