The Office for National Statistics delivered a modestly palatable plate of data this morning, with the Consumer Prices Index holding at 2.2 per cent for August. This steady state, against a consensus forecast of a tick higher to 2.3 per cent, was immediately welcomed by the Treasury as evidence that the worst of the cost-of-living crisis may be in the rearview mirror. Yet for the millions of British families who have endured two years of double-digit price rises, this is a thin gruel indeed.
Let us cut through the spin. Headline inflation remaining static is not a victory; it is a pause. The Bank of England’s Monetary Policy Committee, which cut rates to 5 per cent in August, will take some comfort that services inflation eased to 5.2 per cent from 5.7 per cent, but core inflation excluding food and energy actually rose to 3.6 per cent from 3.3 per cent. This is not the clean disinflationary picture that Threadneedle Street craves. The stickiness of core prices suggests that domestic cost pressures, particularly wage growth and margin rebuilding by firms, are proving resilient.
The real crumb of comfort for household wallets came from the food category. Grocery inflation fell to 1.3 per cent from 1.5 per cent, a level that, while still above the pre-pandemic norm, is at its lowest since October 2021. This will be a palpable relief for the 6 million British families who have been forced to trade down or skip meals. However, let us not forget that over the past three years, food prices have cumulatively risen by 26 per cent. One month of moderation does not a feast make.
The Chancellor, Rachel Reeves, was quick to issue a statement proclaiming that “stabilising inflation is good news for families”. Yet the hard truth is that prices are not falling; they are simply rising more slowly. The level of prices remains punishingly high. For the typical household, real disposable incomes have been squeezed by some £2,000 since 2022, and the Resolution Foundation calculates that the typical earner is still 1 per cent worse off than before the pandemic. The Treasury’s own fiscal headroom is non-existent, and the Autumn Budget looms with the spectre of tax rises.
Market reaction was muted but telling. Gilt yields edged lower on the release, with the 10-year yield dipping to 3.95 per cent, as traders priced in a slightly reduced probability of a further rate hold in September. But the yield curve remains inverted, a classic signal that the market expects the economy to slow, perhaps sharply, in the coming quarters. The pound nudged back above $1.33, but sterling’s strength is a double-edged sword, dampening import price pressures but undermining the competitiveness of UK exporters.
One must also look at what is missing from this data: any sign of a productivity miracle. The UK’s supply side remains hobbled by a shrinking workforce and anaemic business investment. Without an uplift in productivity, any improvement in real wages will be temporary, quickly eroded by the demands of a creaking public sector and the green transition.
For the Bank of England, this report is a licence to tread carefully. Governor Andrew Bailey will no doubt note that the path to the 2 per cent target is not a straight line. The MPC must weigh the risk of keeping policy too tight and choking off the fragile recovery against the risk of easing too soon and ‘sticky’ inflation becoming entrenched. The hawks on the committee will point to the rise in core inflation and the continued strength in wage settlements, which remain above 5 per cent annually.
In summary, this is a report that offers political cover but no economic relief. Steady inflation at 2.2 per cent is a far cry from the 11.1 per cent peak of October 2022, but it is not the 2 per cent target that the Chancellor pledged to achieve. For British families, the food price respite is welcome, but the broader cost of living remains a misery that will not be cured by one month of static numbers. The Treasury can welcome this data, but the hard work of restoring fiscal credibility and fostering genuine, non-inflationary growth has only just begun.
