UK inflation, as measured by the Consumer Price Index (CPI), fell back to zero in August compared to 12 months earlier. Cheaper fuel, in particular diesel, had the largest downward effect on inflation, along with falls in prices for clothing and footwear. The last time CPI recorded a 12 month increase of 2% or greater, 2% being the Bank of England’s inflation target, is December 2013. Inflation excluding the more volatile food and energy prices, core CPI, slowed to 1.0% from 1.2% recorded in July.

Meanwhile figures released today revealed that UK average earnings grew at their fastest pace in more than six years. Excluding bonuses, wages grew at an annual rate of 2.9% in the three months to the end of July. The rate of unemployment also fell to 5.5%. Spare capacity in the labour market is considered a key metric for the Bank of England when considering interest rates.

The low level of CPI suggests that the Bank of England have some scope to ‘wait and see’ a little longer before finally raising the base rate. They will be cognisant however of this further improvement in the labour market. Furthermore, with people’s earnings now growing above the increase in cost of living, they will be looking to see how this feeds into the overall economy, in terms of higher retail sales or perhaps an increase in the savings ratio.

The US Federal Reserve meets today and tomorrow to discuss the potential for an interest rate rise. The market currently anticipates around a 30% chance that they will raise rates tomorrow. Economists surveyed by Bloomberg believe that the Bank of England will look to raise the base rate in the first quarter of next year.