Inflation in the UK rose for the first time this year in July, climbing to 2.2% and surpassing the Bank of England’s 2% target, according to official figures released by the Office for National Statistics (ONS). This increase was primarily driven by a slower decline in gas and electricity prices compared to the previous year.
The rise in inflation was slightly below market expectations, with City analysts forecasting a rate of 2.3% and the Bank of England predicting 2.4%. Services inflation, a key metric for the central bank, fell sharply to 5.2% from 5.7%, significantly under the Bank’s forecast of 5.6%. Core inflation also decreased to 3.3% from 3.5%.
The pound reacted to the news by dipping 0.2% against the dollar to $1.283, reflecting investor anticipation of further interest rate cuts in the coming months. The Bank of England recently reduced interest rates by a quarter point to 5% from 5.25%, marking the first cut since March 2020. Despite the modest rise in inflation, the Bank remains concerned about high services sector inflation and wage growth, which could keep inflation above its target in the long term.
Grant Fitzner, chief economist at the ONS, noted that while domestic energy costs fell, they did so at a slower rate than last year. This was partially offset by a decrease in hotel costs in July, following strong growth in June, which some analysts attributed to Taylor Swift’s Eras tour temporarily boosting accommodation prices.
The inflation uptick presents a significant challenge for Prime Minister Sir Keir Starmer, who has pledged to boost GDP growth and stabilize policymaking. The ONS is expected to report that the economy expanded by 0.6% over the last three months, down from 0.7% in the first quarter.
Darren Jones, Chief Secretary to the Treasury, acknowledged the scale of the economic challenges, emphasizing the government’s commitment to making tough decisions to rebuild the economy. Chancellor Rachel Reeves is anticipated to increase taxes in her first budget on October 30, following a £21.9 billion government overspend.
Forecasters predict that inflation will remain above the Bank of England’s target for the rest of the year due to unfavorable comparisons with last year’s energy and food prices. However, they also expect the Bank to further reduce borrowing costs by 50 basis points by the end of 2024.
Recent data showed a slight decrease in the unemployment rate to 4.2% from 4.4%, leading traders to question whether the Bank’s Monetary Policy Committee (MPC) will lower borrowing costs at its next meeting on September 19. Wage growth eased to 5.4%, a near two-year low.
Yael Selfin, chief economist at KPMG UK, commented that despite the modest rise, inflation was relatively subdued in July due to weaker core and food price inflation offsetting the diminishing impact of earlier energy price falls. This should provide some reassurance to MPC members, as the Bank’s forecasts had pointed to a sharper uptick.
Investors will be closely monitoring the Bank of England’s next moves, as well as the government’s fiscal policies, to gauge the potential impact on the UK’s economic stability and growth prospects.
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