UK inflation remained at 2.2% in August, but core inflation rose to 3.6%. This divergence has led to varied economic perspectives.
The Bank of England is now expected to hold interest rates steady at 5% in its next decision, despite the rise in core inflation.
Headline Inflation Stability
Despite the stability in headline consumer prices, core inflation—which excludes volatile elements like food and energy—accelerated from 3.3% to 3.6%, exceeding economists’ expectations of 3.5%.
The Office for National Statistics (ONS) highlighted that rising airfares, which jumped by 11.9% year-on-year, were the primary driver of inflation in August. Meanwhile, a decline in fuel prices by 3.4% helped keep overall inflation steady.
Impact of Airfares and Fuel Prices
Rising airfares significantly influenced the core inflation rate. Prices in the airline sector saw an 11.9% year-on-year increase, greatly contributing to inflation.
Conversely, fuel prices experienced a 3.4% decline, which played a crucial role in keeping the overall inflation rate steady at 2.2%.
The combination of these opposing trends showcases the complexity of inflation dynamics in the UK.
Restaurant and Hotel Prices
Prices in restaurants and hotels rose at the lowest rate in three years, increasing by 4.4%.
This moderate rise provided some relief amidst the broader inflationary pressures, reflecting a stabilisation in some sectors.
The figures come ahead of Thursday’s meeting of the Bank of England’s Monetary Policy Committee (MPC), where policymakers are expected to maintain the base interest rate at 5%.
Monetary Policy Outlook
The Bank of England, which targets an inflation rate of 2%, made its first interest rate cut in four years this summer and is expected to make gradual cuts moving forward.
Markets anticipate one more reduction in 2024, bringing the base rate down to 4.75%.While overall inflation has stabilised, the rise in core and services inflation—from 5.2% to 5.6%—could concern more hawkish members of the MPC.
Goods Prices and Predictions
Goods prices fell by 0.9% over the year, remaining in deflationary territory.
Economists predict that rising energy prices from October will contribute to further inflationary pressures throughout the year, although wage growth, a previous driver of inflation, has started to ease.
Darren Jones, the government’s Chief Secretary to the Treasury, acknowledged the ongoing strain on households despite the levelling off of inflation.
Government’s Perspective
“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,” said Darren Jones.
In response to the figures, Ruth Gregory, deputy chief UK economist at Capital Economics, suggested that the uptick in services inflation could rule out an interest rate cut in September.
Economic Insights
“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,” commented Ruth Gregory.
Yael Selfin, chief economist at KPMG, also argued that the rise in services inflation “likely closes the door on an interest rate cut tomorrow,” reinforcing the expectation that the MPC will keep rates steady for now.
UK inflation continues to present a complex economic landscape, with stability in headline rates offset by rising core inflation.
The Bank of England faces challenging decisions on interest rates amidst these mixed signals, impacting both households and broader economic confidence.
