Britain’s Home-Grown Price Pressures Finally Easing for the BOE

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Or sign-in if you have an account.nvqk)}o3t49qfxwu0qaz8go[_media_dl_1.png Office for National Statistics(Bloomberg) — For years, economists and policymakers have scratched their heads over Britain’s inflation problem.THIS CONTENT IS RESERVED FOR SUBSCRIBERS ONLYSubscribe now to read the latest news in your city and across Canada.Exclusive articles from Barbara Shecter, Joe O'Connor, Gabriel Friedman, and others.Daily content from Financial Times, the world's leading global business publication.Unlimited online access to read articles from Financial Post, National Post and 15 news sites across Canada with one account.National Post ePaper, an electronic replica of the print edition to view on any device, share and comment on.Daily puzzles, including the New York Times Crossword.SUBSCRIBE TO UNLOCK MORE ARTICLESSubscribe now to read the latest news in your city and across Canada.Exclusive articles from Barbara Shecter, Joe O'Connor, Gabriel Friedman and others.Daily content from Financial Times, the world's leading global business publication.Unlimited online access to read articles from Financial Post, National Post and 15 news sites across Canada with one account.National Post ePaper, an electronic replica of the print edition to view on any device, share and comment on.Daily puzzles, including the New York Times Crossword.REGISTER / SIGN IN TO UNLOCK MORE ARTICLESCreate an account or sign in to continue with your reading experience.Access articles from across Canada with one account.Share your thoughts and join the conversation in the comments.Enjoy additional articles per month.Get email updates from your favourite authors.THIS ARTICLE IS FREE TO READ REGISTER TO UNLOCK.Create an account or sign in to continue with your reading experience.Access articles from across Canada with one accountShare your thoughts and join the conversation in the commentsEnjoy additional articles per monthGet email updates from your favourite authorsSign In or Create an AccountEven as post-pandemic supply shocks faded and neighboring countries regularly hit their inflation targets, the Bank of England struggled to curb the UK’s stubborn home-grown price pressures. Today, Governor Andrew Bailey finally has a different story to tell on the domestic front: an improvement that buys his Monetary Policy Committee precious time as officials try to avoid hiking interest rates in response to the US-Iran war.The BOE is likely to strike a wary tone in its latest decision on Thursday as the recent resurgence in global oil and gas prices threatens to blow it off course. But there are signs that Britain’s home-grown inflation problem may be fading fast.Get the latest headlines, breaking news and columns.By signing up you consent to receive the above newsletter from Postmedia Network Inc.A welcome email is on its way. If you don't see it, please check your junk folder.The next issue of Top Stories will soon be in your inbox.We encountered an issue signing you up. Please try again“The data is suggestive of softer domestic input cost pressure than really anything we’ve seen, I would argue, since before the pandemic,” said Simon French, chief economist at Panmure Liberum. “Therefore, that argument for why you need to be tightening monetary policy is softening quite quickly.”The parts of Britain’s consumer shopping basket that are the least import intensive, a proxy for domestic pressures, are stoking inflation far less than last year. The contribution of these items — which include housing rent, hairdressing and beer — to headline inflation has fallen to its lowest since around the time of Russia’s invasion of Ukraine in early 2022. Overall price growth has fallen to 2.6%, the lowest in 15 months.Private-sector pay growth, once a source of rising costs for British companies, has cooled to below 3% for the first time since 2020, a level now consistent with the BOE meeting its 2% inflation target. Meanwhile, economic growth is pedestrian and a once-tight labor market has loosened considerably with fewer vacancies for more unemployed people.The BOE is expected to leave rates on hold at 3.75% this Thursday, as it tries to navigate the fluctuations in oil and gas prices since the Iran war broke out. A more benign domestic situation is fast being overtaken by events abroad with oil prices hitting $100 a barrel in recent days. The hangover from the initial shock is still coming through the pipeline, too, with household energy bills climbing 13% in July when the UK’s price cap updated.“Headline inflation is still above the target; it’s going to pick up in July, we all know that,” said Bruna Skarica, chief UK economist at Morgan Stanley. “But underlying services inflation has been falling for a year now, as have pretty much every measure of pay growth as well.” The UK is not out of the woods yet on inflation. The latest rocketing of oil and gas prices raises the risk of second-round effects from firms and workers trying to compensate for the squeeze by passing on price increases and bidding up wages. Hawks on the committee including Chief Economist Huw Pill and rate-setter Megan Greene have also feared that the easing in price pressures stalled even before the conflict. This advertisement has not loaded yet.This advertisement has not loaded yet, but your article continues below.However, those fears now look overstated with inflation running well below where the BOE had expected in the early months of the war. The domestic situation is helping, with workers left with little leverage and firms similarly bereft of pricing power.Paul Dales, chief UK economist at Capital Economics, said the official inflation data — which has surprised to the downside for the past three months — suggest “there was a bit more disinflation in the system before the Iran war started.”A flurry of announcements by new Prime Minister Andy Burnham — including a cut to value-added tax on household electricity bills and a cap on many bus fares — “will have a modest downward influence on the Bank’s CPI projections,” Dales added.The latest report from the BOE’s network of agents also underscored the more benign backdrop on Friday with supermarkets expecting weaker food inflation given tepid consumer demand. Falling prices year-on-year in clothing and footwear and household goods and furniture stores suggest heavier discounting as retailerts try to tempt cautious consumers.Notice for the Postmedia NetworkThis website uses cookies to personalize your content (including ads), and allows us to analyze our traffic. Read more about cookies here. By continuing to use our site, you agree to our Terms of Use and Privacy Policy.