Headline inflation drops unexpectedly to 6.7%

The latest inflation figures are here and despite the predicted rise in the rate of inflation, headline inflation as measured by the Consumer Prices Index (CPI) dropped to 6.7% in August.

The new report, published by The Office for National Statistics (ONS), showed a small reduction of just 0.1% from July’s rise in CPI inflation of 6.8% , meaning prices, although still rising are continuing to fall month on month.

Following this surprise drop in inflation, the Bank of England finally halted the interest rate increases. Rates are now holding at 5.25%, marking an end to the historic 14 consecutive base rate rises. Those paying back mortgages can now take a breath, but we’re not out of the woods yet.

What is inflation and how is it measured?

Inflation is a measure of how the prices of goods and services have increased over time. Goods are tangible items sold to customers, such as food, while services are tasks performed for the benefit of recipients, such as a haircut. Generally, this increase is measured by considering the cost of things today compared to how much they cost a year ago. The average increase between these prices is demonstrated in the inflation rate.

Rising interest rates directly affects the cost of living. For example, if the price of a bottle of milk is £1, and inflation is increasing by 5%, then your bottle of milk will cost you 5p more. Or, in other words, the spending power of your money has decreased by 5%. 

Ideally, the Government wants to keep inflation low and stable. The general mandated target for the Bank of England is 2%. Anything significantly above or below this target is thought to cause potential issues for the economy. 

An unexpected drop

According to the ONS report, some of the biggest contributors to the drop in headline inflation came from food, where price rises began to slow more in August 2023 than a year ago, and accommodation services, the prices of which fell in August 2023. However, it should be noted that prices are volatile in accommodation services, and this may not indicate a trend. 

On the other hand, one of the largest upward contributors was the price of motor fuel which continued to rise into August and is showing no signs of slowing.

Interesting to note were the prices of food and non-alcoholic beverages, whose prices rose by only 0.3% between July and August 2023 compared to the rise of 1.5% between the same two months a year ago. This is a significant reduction even though headline inflation rates across both periods were similar, and possibly gives some hope of food and drink prices finally slowing. 

With headline inflation and interest rates remaining relatively high, it’s more important than ever to make sure your finances are handled responsibly and with the right guidance. At TPO, we understand the stress surrounding the current economic climate. As a chartered firm of independent advisers we are unbiased, meaning that our advisers can give whole of market advice, and so are best placed to give you a plan tailored exactly to your personal financial goals.  

If you’d like to know more, request a free non-committal initial consultation with one of our team or give us a call on 0333 323 9065 and get in touch.

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This article is intended for general information only, it does not constitute individual advice and should not be used to inform financial decisions.