UK CPI falls flat in August as expected

Consumer prices in the UK were flat in August versus a year ago, amid a retreat in the price of oil and a washed out summer keeping shoppers away from the high street.

The consumer price index (CPI) rose by 0.2% month-on-month in August but was flat versus a year ago, according to the Office for National Statistics, a fall from the previous month that had been expected by economists.

The fall in CPI from 0.1% in the year to July was mainly due to clothing and motor fuel prices.

In comparison to July, the largest falls were seen in prices for recreation and culture (-0.4%), communication (-0.2%) and health (-0.1%).

At the ‘core’ level, which strips out the more volatile components such as food and energy, CPI's yearly rate dropped to 1% from 1.2% a month before, also as expected.

The drop in the core figure was due to clothing prices reversing after a pick-up in the previous month.

Maike Currie, associate investment director at Fidelity, said: “Inflation has now been flat or negative for five out of the past seven months – a far cry from the Bank of England’s 2% inflation target.”

However, Currie urged clients to distinguish between disinflation – a slowdown in the rate of inflation; and deflation – a persistent and ongoing fall in prices.

UK inflation is likely to stay around zero for most of the rest of this year, Capital Economics declared.

Ian Stewart, chief economist at Deloitte, said the plummeting prices were fuelling UK consumer spending power and noted that this had helped push consumer confidence to a 15 year high.

"At the same time, with inflation forecasts for next year sliding, the Bank is under no pressure to hike rates. Low inflation is the Bank of England’s trump card in coping with the effects of weakness in China and choppy equity markets.”

Looking out to Thursday’s US FOMC decision, Fidelity's Currie believes “the reality is that whatever happens this week, interest rates on both sides of the Atlantic will remain lower for longer. The long slow recovery from the financial crisis will ensure that central banks take no risks.”