Softer oil and a weaker dollar offer modest relief for UK inflation

Oil extended declines into Thursday’s European morning while the dollar weakened on rising expectations of US rate cuts, offering marginal relief to the UK’s inflation arithmetic ahead of the autumn Budget.

Brent’s pullback followed a more than 2 percent drop the previous session and comes as OPEC+ members prepare to discuss weekend output targets. The softer energy tone, alongside a weaker dollar, eased near‑term pressure on UK input costs and pump prices.

Currency markets have turned after US labour indicators showed cracks, with traders now pricing a high probability of a September Federal Reserve cut and further easing this year. That left sterling steadier after a volatile week linked to gilt swings. While exchange‑rate effects transmit with lags, a firmer pound against a softer dollar typically dampens tradables‑inflation pass‑through for UK importers, all else equal.

The key domestic swing factors remain energy and food, which have been slower to normalise than services prices. Any extension of oil’s decline into shoulder season would help households and logistics operators. Analysts caution, however, that UK‑specific drivers such as regulated bill adjustments and fiscal decisions on fuel duty can offset global energy relief. Markets will parse September’s BoE decision for guidance on the inflation path, with Governor Andrew Bailey indicating the Committee will weigh QT pace and market conditions alongside the policy rate.

For now, the mix of lower crude and a weaker dollar improves the near‑term balance for the OBR’s forecast inputs. The durability of that relief will depend on OPEC+ outcomes, US data and how UK gilt dynamics evolve into the Budget period.