The UK inflation rate held steady at 2.2% in August, with core inflation rising, driven by increased airfares.
- Core inflation rose to 3.6%, surpassing expectations and highlighting rising service costs.
- The Bank of England is anticipated to maintain its base interest rate at 5% amidst these inflation dynamics.
- Despite the headline stability, the growing pressure from core inflation could influence future monetary policy.
- Consumers continue to face high price levels, despite easing wage growth and stable inflation overall.
In August, the UK’s headline inflation rate remained unchanged at 2.2%, yet core inflation, which excludes the more erratic categories of food and energy, saw an uptick from 3.3% to 3.6%. This increase in core inflation exceeded the expectations of many economists, who had predicted a rise to 3.5%. The Office for National Statistics (ONS) pinpointed soaring airfares, which surged by 11.9% year-on-year, as a principal factor contributing to this month’s inflationary pressures. Meanwhile, a 3.4% slump in fuel prices helped retain the overall inflation rate at its current level.
The impending meeting of the Bank of England’s Monetary Policy Committee (MPC) is anticipated to uphold the base interest rate at 5%. The Bank aims for an inflation target of 2% and, after a series of monetary adjustments, including the first rate cut in four years this past summer, is foreseen to continue with moderate reductions. The financial markets predict another rate cut in 2024, potentially decreasing the base rate to 4.75%. Although headline inflation appears stable, increased core and services inflation—from 5.2% to 5.6%—might be a source of concern for the hawkish elements within the MPC.
Goods prices remain deflationary, showing a 0.9% decline over the past year. Yet, economists caution about the prospect of rising energy prices in October, which could impose further inflationary pressures throughout the year. Despite these challenges, there has been a mitigation in wage growth, a former inflationary driver, providing some relief to the economic environment.
Darren Jones, the UK’s Chief Secretary to the Treasury, recognizes the adverse effects the inflationary period has had, stating, “Years of sky-high inflation have taken their toll and prices are still much higher than four years ago. While more manageable inflation is welcome, we know that millions of families across Britain are struggling, which is why we are determined to fix the foundations of our economy so we can rebuild Britain and make every part of the country better off.”
Reacting to the latest data, Ruth Gregory, deputy chief UK economist at Capital Economics, indicated that the rise in services inflation could preclude an interest rate cut in September by asserting, “A pause on interest rate cuts was already expected tomorrow, and today’s release cements that view. We continue to assume the next 25 basis point rate interest rate cut will take place in November.” Similarly, Yael Selfin, chief economist at KPMG, echoed the sentiment that the elevated services inflation likely halts possible rate cuts in the immediate term.
The UK inflation scenario, characterized by stable headline inflation and rising core rates, suggests potential reconsiderations in monetary policy moving forward.
