UK inflation slips, still above BoE levels

The UK CPI recorded an annual rate of 9.9% in August, lower than the expected 10.2%, and out of the double-digit level; but the core data rose slightly, which will not provide much comfort for the development of overall inflation. It would still keep the Bank of England on a tightening path, while keeping fresh concerns about the economy in place as soaring price pressures hang over households.

The current energy crisis is likely to have a more pronounced impact on the UK job market in the coming months, but the government's freeze on household and business energy bills should avoid a sharp rise in unemployment this winter. The question now is whether pressure on energy prices will force companies to revisit these plans and make more substantial changes to their workforce. For now, demand for workers appears to be cooling, but not fast, and layoffs are low and steady.

Institutional analysis: UK inflation has fallen, but it still exceeds the Bank of England's desired level. The deadly combination of higher inflation and weaker job applications on Tuesday will continue to spell more trouble for the Bank of England. One piece of good news to cheer about was the upbeat average hourly earnings figure which improved sharply to 5.2%, beating expectations for 5.0% and the previous reading of 4.7%. Households have been forced to spend more due to soaring price pressures, but this cannot be offset by lower wages. Now, rising household incomes will support them as they deal with soaring energy bills and food prices.

Spokesperson for Prime Minister Truss: The government will confirm further details of the commercial energy package next week. The UK will formulate an energy bill for companies next week. The commercial energy support plan is still being developed. Dating back to October 1, the UK is considering changing the date when parliament adjourns.

At 19:00 on September 22, Beijing time, the Bank of England will announce its interest rate decision and meeting minutes. Goldman Sachs said in a report that the Monetary Policy Committee is not ready to raise interest rates by 75 basis points at its upcoming meeting, which is an important short-term risk for the pound. The Monetary Policy Committee is likely to hold on to another 50bps rate hike as they factor in the impact of the UK government's recently announced energy price cap, which is expected to significantly reduce UK inflation peaks.

UOB economist Lee Sue Ann said further policy tightening is likely to lead the Bank of England to raise policy rates by 50 basis points at a later meeting. As the cost of living crisis worsens, bank rates have only room to rise by a further 50 basis points, to 2.25%, after which rate hikes will be paused. Still, we bear in mind that the BoE has issued a warning that "policy is not on a pre-set path" as the Bank of England expects a recession in the UK to start in the fourth quarter and continue into next year. The Bank of England also raised its forecast for a peak inflation in October to 13.3% as gas prices surged, warning that price gains would remain high.

With market bets on a rate hike by the Bank of England well ahead of its time, acceptance swaps expiring on the day of the BoE's policy meeting next week could become hot. While headline inflation fell modestly last month, inflation remains at multiples of the BoE's target and core inflation is still accelerating.

The number of new jobs added in August far exceeded expectations, reflecting the tightness of the domestic labor market. Traders are now pricing in a nearly 90% chance the Bank of England will raise rates by 75 basis points next week. Even so, it's unclear whether the Bank of England is in the mood to raise rates significantly, especially given the Bank of England's recently proposed energy bill cap. In this round of rate hike cycle, the Bank of England has been quite cautious in curbing inflation.