Digging Deeper: Lower energy bills are driving down inflation.
Last year, Russia’s invasion of Ukraine made wholesale energy prices soar, but price caps on bills in Britain meant that households felt these increases with a lag. The same has been true as wholesale prices have dropped this year.
In October, the inflation rate was pulled down by a drop in household energy costs as the cap — set every three months by the energy regulator — was lowered. The average household bill was set to 1,834 pounds ($2,293) per year, 7 percent lower than before. A year ago, overall inflation hit a peak of more than 11 percent on a jump in household energy costs, even after the government intervened to subsidize these payments.
Food inflation, which had taken over from energy as the main driver of inflation in recent months, also slowed in October. Food prices rose 10.1 percent, the slowest pace since June 2022.
Even as policymakers draw comfort from slowing headline inflation, they are carefully watching other measures of domestic price pressures to see how persistent inflation might be. These are falling more slowly. For example, officials look at core inflation, a measure that excludes food and energy prices, because they can be volatile and heavily influenced by international financial markets. Last month, core inflation eased to 5.7 percent, down slightly from 6.1 percent in September.
Policymakers also track wage growth, one of the stickier aspects of inflation. Price growth in the services sector, which is heavily influenced by companies’ wage costs, slowed to 6.6 percent. Data published on Tuesday showed that wage growth had slowed in the third quarter, but at a 7.7 percent annual pace, it was still near historical highs.
Why it Matters: The government meets its promise to halve inflation.
At the start of the year, when inflation exceeded 10 percent, Prime Minister Rishi Sunak pledged to halve inflation in Britain by the end of year. After Wednesday’s data was released, he claimed victory on this promise.
But that doesn’t end Britain’s inflation problem. Controlling inflation is actually in the hands of Bank of England policymakers who are mandated to return inflation sustainably to 2 percent.
Huw Pill, the central bank’s chief economist, said on Tuesday that there had been “significant” progress in bringing down inflation, but that it was still too high, so policymakers had “some work to do.”
Speaking at an event in Bristol, Mr. Pill warned that on some underlying measures of inflation the news was “frankly not so good.” For example, pay growth is too fast to be consistent with inflation at 2 percent.
What Happens Next: Interest rates are expected to stay at the highest level in 15 years.
Inflation is expected to continue to fall, to about 3.4 percent by the end of next year, but Bank of England officials have said they will keep interest rates high until they are sure that inflation will definitely return to target. The bank’s policymakers have held rates at the highest level since 2008 for their past two meetings, after raising them from near zero starting in late 2021.
The impact of these past rate increases is expected to deepen and further dampen inflationary pressures. Over the next year and a half, the British economy is expected to flatline, according to the central bank.
But there are risks that inflation proves more persistent than expected or that conflict in the Middle East causes a surge in energy prices that revives price pressures.