The Office for National Statistics said the drop in the year-on-year rate was due to airfares, petrol and diesel and clothing prices rising more slowly than in August 2012.
Ernst & Young’s ITEM Club said the moderate easing of inflation had been expected, and it believes it peaked in June this year at 2.9% and will likely continue easing over the next few months.
“There is little sign of any inflationary pressure from the supply pipeline and, with global growth disappointing and tensions in Syria easing, commodity prices might soften more, exerting a further downward pressure on prices.
“Nevertheless, we see inflation remaining above the 2% target for the foreseeable future. Inflation will probably settle at around 2.2% in 2014 and 2015. But this is still some way below the Bank of England’s 2.5% knockout so the Bank can focus on getting unemployment down below 7% and keeping rates at 0.5% until at least 2016.”
Reversal imminent?
Marcus Bullus, trading director of MB Capital, thinks it could yet reverse, however: “Inflation is edging down but in the current climate the fall in prices could be easily reversed. With Syria, oil prices are back in the game and when they are at the table things can deteriorate very quickly.
“Wage inflation is being massively outpaced by CPI and there’s no sign that there will be any change on that front in the near future. Companies, while more confident, are still keeping an eye on cost. The Bank of England knows full well that while prices are coming down, there’s every chance they could be going back up again, and as early as next month.”
For investors, the dip in inflation to 2.7% marks the first time in two years they are getting a positive return on gilts, as the 10-year gilt yield index is currently offering a gross redemption yield of 2.9% – 0.2% above inflation.
The same cannot be said of money held in cash, according to Hargreaves Lansdown’s Adrian Lowcock.
“The long-term effects of inflation on your money are huge. Inflation (CPI) at 2.7% will halve the real value of your savings in 26 years.
Since March 2009, when interest rates were reduced to record lows, the average cost of goods and services has risen by 14.8% (CPI).
Cash has only risen by 3.4%, so after interest the value of savings has been eroded by 9.9%.”
