UK Inflation Stays at 3.8% for 19th Month, Pressuring Households

In August, the United Kingdom's inflation rate remained steady at 3.8%, marking the 19th consecutive month at this elevated level. This persistent high inflation continues to exert pressure on households across the nation. Market analysts anticipate that the Bank of England will announce on Thursday that it will maintain the current interest rate.

The Office for National Statistics (ONS) released data on Wednesday indicating that the annual inflation rate for August, as measured by the Consumer Price Index (CPI), remained unchanged from July at 3.8%, aligning with market expectations. While the year-on-year increase in airfare prices narrowed, prices for restaurant and hotel services, as well as gasoline and diesel, saw an expansion in their respective increases.

Excluding the volatile costs of energy and food, the core inflation rate for August decreased to 3.6%, in line with economists' previous forecasts. The inflation rate for food and beverages rose from 4.9% in July to 5.1% in August, indicating that consumers continue to face higher prices for goods. This means that items costing 100 pounds in supermarkets last year now require 105.10 pounds to purchase.

The Chief Economist of the ONS highlighted that after the inflation rate increased in July, it stabilized in August due to the offsetting effects of various price changes. The primary factor pulling down inflation was the cost of air travel, which had surged in July due to the summer travel peak, resulting in a significant narrowing of the year-on-year increase in August. However, this effect was countered by rising gasoline prices and a reduction in the year-on-year decrease in hotel accommodation prices.

Food price inflation has been on the rise for the fifth consecutive month, with prices for various vegetables, cheese, and fish products experiencing slight increases. In August, prices for vegetables, milk, cheese, and fish rose, while prices for bread, cereals, and oils decreased.

Retailers across the country are feeling the strain of rising weekly shopping costs. While retailers are doing their best to offer consumers high-value products, the additional 700 million pounds in costs due to increased national insurance, the rise in the National Living Wage, and the new packaging tax have put significant pressure on the retail sector. These costs cannot be fully absorbed by retailers alone.

The Chancellor of the Exchequer has the opportunity to take action in the upcoming budget to alleviate this situation by significantly reducing the business tax rate, ensuring that no stores are burdened with additional fees. If the government chooses to impose more costs on the retail sector, households will feel the economic pressure more acutely during their weekly shopping trips.

The current inflation rate in the UK remains significantly higher than the Bank of England's target of 2%, reinforcing market expectations that policymakers will not lower interest rates again this year.

The Chancellor of the Exchequer acknowledged the challenges faced by households, noting that the economy appears to be stagnant for many. In response, a series of measures have been implemented through the 'Plan for Change' to reduce living costs and support those facing high bills. These measures include increasing the National Living Wage, extending the 3-pound public transport fare cap, and expanding free school meal eligibility, all aimed at increasing disposable income and fostering a stronger, more stable economy that rewards hard work.

The UK continues to have the highest inflation rate among the G7 nations. In August, the inflation rates in the United States, Canada, France, Italy, and Germany were all below 3.8%.

For households struggling with tight budgets and balancing expenses, the stable inflation rate of 3.8% over the past 12 months has provided little relief. For the Chancellor of the Exchequer, who is preparing for the autumn budget, the persistent high inflation is also unwelcome news. The combination of high inflation, weak economic output, and a cooling job market will add to the pressure on decision-making, particularly when considering which taxes to increase to fill the public finance gap.

The Chancellor of the Exchequer is scheduled to announce the autumn budget on November 26, with market expectations that it will include tax increases to achieve fiscal balance.

The overall inflation rate is nearly double the Bank of England's target rate, and for low-income consumers, the actual inflation pressure may be even greater due to the higher proportion of food expenses in their total spending, which has increased by 5.1% year-on-year. The sustained high inflation rate means that the Bank of England is unlikely to lower interest rates to stimulate the economy, which is a double blow for the government. The government urgently needs economic growth or lower interest rates to gain more fiscal adjustment space.