Inflation Surprise Hits British Pound

September 30, 2019

On Wednesday 18 September the Office for National Statistics (ONS) announced that UK inflation has dropped to its lowest level since December 2016, with the Consumer Price Index (CPI) rising by 1.7% year-on-year in August. This defied economist predictions, which expected a dip to 1.9%, down from 2.1% in July. This sharper-than-expected fall has had repercussions for UK currency.

Slowing Prices

The contributing drivers to this drop were largely down to the falling prices in computer games and a slower increase in clothing prices.

Simultaneously, yearly growth in house prices has slowed, with the average UK house price increasing by only 0.7% from the start of the year, down from 1.4% in June 2019.

In fact, data from July suggests that four out of the nine regions in the UK have seen a decline in the year-on-year average house price growth, namely, the East, South East, North East and London regions.

Political Uncertainty

It would not be the biggest inductive leap to suggest that it is economic and political uncertainty contributing to this decline. Naturally, house prices will start to fall if there is less demand, and currently, it would seem that many people are putting off moving house.

This weaker-than-expected inflation sent the pound sterling down 0.41% against the dollar to $1.2450, and down 0.18% against the euro to €1.13.

Interestingly enough, with the Bank of England’s monthly interest rate decision meeting happening on Thursday 19 September, it would seem that monetary tools will not be used to adjust for this inflation rate.

There is no expectation to change the current rate of interest. This is because a decrease in the interest rate could cause further damage in the case of a hard Brexit sending prices spiking after October 31.

Silver Lining

Although slower increases in the price level are often synonymous with a slowing economy, this announcement from the ONS should not be perceived as all doom and gloom.

The average UK wage is now rising at a rate of 4%, which is 2.5 times as fast as the cost of living, 3 times as fast as average private rents and a whopping 6 times as fast as house prices. It is almost unprecedented in this century for UK living standards to be rising as quickly as they are.