UK inflation remains unchanged at 2.2%

After the annual inflation rate in the UK remained at 2.2% in August, it is expected that Bank of England will keep interest rates unchanged on Thursday. Official figures reveal that consumer prices remained stable from July to August when measured annually, defying expectations of a slight rise up to 2.3%. The Bank, who cut interest rates in august, targets a CPI of 2%.

The core inflation rate, which excludes volatile items such as food and fuel, increased from 3.3% to 3.63%, higher than the economists’ forecast of 3.53%. The Bank’s Monetary Policy Committee monitors services inflation. It jumped from 5.2% to 5.62% in August. Goods prices, which are a measure of the Bank’s core inflation, fell by 0.9% over the past year.

Office for National Statistics reported that the largest driver of price increases last month was air fares, which rose by 11.9% on an annual basis and by 22.0% between July and august, after falling the previous year. Fuel inflation fell by 3.4%, and prices at restaurants and hotels increased by 4.4%, the lowest inflation rate in three-years.

ONS reported that the ONS also noted a decrease in food price inflation, which fell from 1.5% to 1.3% over the past year. Alcohol and tobacco prices rose from 7.2% to 5.7%. The UK’s headline inflation rate is now the exact same as the eurozone, at 2.2%. It is also lower than the 2.5 percent recorded by the United States last month.

Investors bet that the UK will not change its monetary policy before November, and so the pound rose 0.4 percent to $1.321. Bond yields also increased. In afternoon trading, the FTSE 100 fell by 0.45 percent and the FTSE 250 by 0.6 percent.

It is expected that the MPC, which has nine members, will maintain the base rate of 5 percent on Thursday. This summer, the MPC relaxed policy for first time in 4 years. However, it is expected that they will gradually reduce borrowing costs this year. The markets expect that the base rate will only be reduced by one percentage point in 2024, bringing it to 4.75 percent.

Dani Stoilova said that the inflation figures “justify” a cautious monetary policy. We continue to expect the MPC to vote to keep Bank Rate at 5%, maintaining its guidance and signaling that there is not a predetermined path for policy moving forward.

The economists predict that energy prices will rise by 10 percent from next month, which is expected to drive inflation up for the rest of the year. Wages have also started to fall.

Ruth Gregory, Capital Economics’ deputy chief UK economist, said that a rate reduction of a quarter percentage point is likely to occur in November. “Rates will be reduced at alternate Bank meetings up until June [2025]”, she added.

Two dovish MPC members, Swati Dhingra and Sir Dave Ramsden, could still vote in favor of a base rate reduction to 4.75 percent, but they will likely be over-ruled by the majority of the committee including Andrew Bailey, the Bank Governor.

Darren Jones, chief secretary to Treasury for the Government, said that “years of high inflation have taken a toll, and prices are much higher than they were four years ago.” We welcome a more manageable level of inflation, but we also know that many families in Britain are suffering. That is why we want to rebuild Britain so we can make it better for everyone.