UK inflation in surprise drop to 18-month low

British inflation unexpectedly slowed in August, data showed Wednesday, hitting an 18-month low and sparking hope this week's widely-forecast interest rate hike by the Bank of England could be its last for now.

The Consumer Prices Index dropped slightly to 6.7 per cent from 6.8 per cent in July, the Office for National Statistics (ONS) said in a statement on the eve of the BoE's latest monetary policy decision.

That was the lowest since February 2022 and confounded expectations for an acceleration to 7.1 per cent on higher energy prices.

Wednesday's news sent the pound sliding almost 0.4 per cent to $1.2347 in morning deals, with the US Federal Reserve set to hold rates later in the day.

Finance minister Jeremy Hunt said his Conservative government's plan to lower inflation is "working" but conceded that the rate is "still too high".

It comes one day after data showed eurozone inflation also slowed slightly in August.

"The surprise fall in UK inflation triggered a kneejerk selloff in sterling, as today's data cements the expectation that the Bank of England's next rate hike could also be its last," said Swissquote Bank analyst Ipek Ozkardeskaya.

Despite the drop, British inflation remains the highest in the G7 group of rich nations, after peaking at a 41-year high of 11.1 per cent in October last year.

Elevated inflation has prompted almost 18 months of regular stoppages by public and private-sector workers whose pay is failing to keep pace.

In the latest walkout, medical consultants and junior doctors working in England for the country's National Health Service held their first ever joint strike on Wednesday.

The BoE has so far ramped up its key interest rate 14 times in a row to the current level of 5.25 per cent in a bid to bring down red-hot inflation.

The data "probably won't be enough to prevent the BoE from raising interest rates... to 5.50 per cent tomorrow", noted Capital Economics analyst Paul Dales.

"But it supports our view that that will be the last hike".

The ONS added that food prices rose by less in August than a year earlier. This impact was only partially offset by higher energy costs.

"The rate of inflation eased slightly this month driven by falls in the often-erratic cost of overnight accommodation and air fares, as well as food prices rising by less than the same time last year," said ONS chief economist Grant Fitzner.

"This was partially offset by an increase in the price of petrol and diesel compared with a steep decline at this time last year, following record prices seen in July 2022."

However, economists caution that this week's rebound in oil prices toward $100 per barrel will fuel fresh inflationary pressures.

"The ramping up of crude prices over recent weeks will filter through, but there will be relief that oil prices have also snuck away from the week's highs," said Susannah Streeter, head of money and markets at Hargreaves Lansdown.

Oil prices have jumped largely because of output cuts by key producers Russia and OPEC kingpin Saudi Arabia, which will be in place until the end of the year at least.