A Sigh of Relief on Threadneedle Street

After a scintillating run of price increases, the UK’s PPI has finally fallen in August and the all-important core rate has dropped and decelerated. The accompanying chart shows the sharp break-off in the rate of PPI core inflation to just under 2.8% over three months even as its year/year rate lingers at 6.3%. Headline inflation is still at an astonishing 9.7% year/year but the three-month pace has fallen to 3.3%. The Bank of England puts a 2% ceiling on headline consumer price inflation and has no corresponding number for the PPI or for any core measure. But with oil having dominated inflation trends, the core has to be an important signal these days. The PPI tends to be more volatile than the CPI so we cannot make any firm statements about the CPI since it will include imported goods and services prices. But the trend shift in inflation’s pace is severe. The forces bringing the PPI down should translate to the CPI. The move lower has been long awaited since spot oil prices had broken from their peaks some time ago. This sort of dramatic decline could pave the way for rate cuts even with an excessive CPI pace since the drop is indicative of an ongoing process and a deflation that is sudden and severe. It unties the hands of policymakers to some extent but contains no assurances of imminent rate cuts.