UK Inflation Set to Rise Amidst Bank of England Interest Rate Cut

The UK economy is bracing for a potential uptick in inflation, mere weeks after the Bank of England’s decision to lower interest rates for the first time in over four years. Economists predict that the July inflation figures, due to be released this week, will show a rise to 2.3 per cent, following two months of stability at 2 per cent, which aligns with the central bank’s target. These forthcoming numbers will shed light on the economy’s performance during the first month under the new Labour government.

The Office for National Statistics is also set to provide updates on economic growth, the labour market, and retail sales. Analysts anticipate a 0.2 per cent increase in gross domestic product for June, maintaining the quarterly growth rate at 0.7 per cent, which was the highest among G7 nations. BDO, a consultancy firm, reported that its output index surged at the fastest pace in two years in July, driven by the manufacturing sector and the summer tourism season.

Prime Minister Sir Keir Starmer has set an ambitious goal of boosting long-term economic growth to 2.5 per cent and positioning Britain as the fastest-growing G7 economy. However, analysts remain sceptical about achieving this target without significant investment. Investec analysts suggest that the hospitality sector likely benefited from increased pub spending during the European football championships in June. However, unfavourable comparisons with energy prices from the previous year are expected to push the headline inflation rate higher in July.

Sanjay Raja, Deutsche Bank’s chief UK economist, noted that while energy prices will likely drive headline inflation up in the second half of 2024, there is a silver lining: services inflation, which stood at 5.7 per cent in June, should continue its gradual descent. The Bank of England has been closely monitoring services inflation when deciding on interest rate adjustments.

During its recent rate-setting committee meeting, when the base rate was reduced by a quarter-point to 5 per cent, the Bank stated that it would now focus more on general economic trends rather than a single indicator. This week, international economic data releases may also trigger significant stock market movements. Last week, global share prices fluctuated widely following US job figures that fell short of expectations, raising concerns about a potential recession.

Updated estimates from the US Bureau of Labor Statistics, due on Wednesday, are expected to show a slight decrease in annual inflation, from 3 per cent in June to 2.9 per cent in July. Following the weak US jobs report and the recent global stock market turbulence, investors have priced in aggressive policy easing by the US Federal Reserve, with some even predicting an emergency interest rate cut before the Fed’s next meeting on September 18.

Market predictions currently suggest that the Fed will lower the federal funds rate by a full percentage point this year, from its 23-year high range of 5.25 per cent to 5.5 per cent. As the UK economy navigates these uncertain times, all eyes will be on the upcoming inflation figures and the potential impact of the Bank of England’s recent interest rate decision. The nation’s economic resilience will be put to the test as it adapts to the new Labour government’s policies and the ever-changing global financial landscape.