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UK Inflation falls to 2.5%

UK Inflation falls to 2.5%

The UK’s main inflation rate fell back towards the 2% target in August, reversing the unexpected jump the previous month. Official data from the Office for National Statistics (ONS) showed the Consumer Prices Index (CPI) inflation rate fell to 2.5% last month, down from 2.6% in July. The reading in July caught out many commentators who forecast a drop to 2.3%, with rising oil prices starting to feed into the reading.

However, the latest figure has once again moved inflation back towards the Bank of England’s 2% target – and helped vindicate the aggressive monetary policy pursued by the Bank. Inflation has come in sharply as global growth has slowed and the UK’s economy struggles to fight its way out of the current low growth malaise it is stuck in.

The Bank of England’s £375bn quantitative easing programme – and its move to slash the base rate to a record low of 0.5% – has helped to stimulate inflation and stave-off a deflationary environment, and while the Bank’s governor Mervyn King expects inflation to pick up later this year, he is growing increasingly concerned about the outlook for the US and Europe. Sir Mervyn King said in June that he has been voting for more QE because of these concerns.

On the FX market sterling has held firmly against the dollar and is currently trading at 1.6223-1.6256. GBP/EUR has edged up to 1.24

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