What's going on?

Some data on inflation (i.e. the rate at which prices are rising) in the UK came out on Tuesday � and it caused the pound to sell off by about 1% versus other currencies. It�s kind of complicated� let�s break it down.

What does this mean?

1. The prices that consumers pay for things did not rise as much in August as predicted.
2. Investors took that data to mean that the UK�s central bank, the Bank of England (BoE), is more likely to take further action to decrease interest rates (see below for an explanation).
3. The prices that firms pay for their inputs (e.g. what factories pay for their steel) rose aggressively in August (at the fastest pace since 2011) – that likely means higher prices for consumer goods are coming (e.g. the inputs for a car are more expensive, so the price of a car is likely to go up).

Why should I care?

For you personally: Prices aren�t picking up quickly� yet.
The pound has dropped about 10% in value versus most other currencies since the Brexit vote. That is likely to increase the cost of things in Britain partly because Britain imports so much stuff from abroad (e.g. avocados from Spain have got more expensive). The good news for you is that prices are, so far, rising less than expected. The bad news is that virtually all economists still expect inflation to pick up sooner than later.


The bigger picture: Less inflation, arguably, gives the BoE more room to act.
Let�s run through the logic here: lower interest rates tend to pull down the value of the currency (e.g. the pound) (see our explanation here). A lower pound pushes up inflation (see above). So, if the BoE lowers interest rates, it runs the risk of pushing up inflation too much. But given that inflation seems to have risen less than expected, too much inflation is less of a concern. As such, the BoE has (in theory at least) more room to lower interest rates if it wants to (e.g. to try to boost the economy).