[ad_1]
Inflation in the United Kingdom remained stable at an annual rate of 2.2% in August, as higher airfares were balanced out by lower fuel costs and reduced restaurant and hotel bills, according to official figures released on Wednesday.
The latest data from the Office of National Statistics (ONS) indicates that inflation is slightly above the Bank of England’s (BoE) target of 2%.
This data suggests that the BoE is likely to refrain from another interest rate cut this week. Last month, the bank lowered its main interest rate by a quarter-point to 5%, the first cut since the beginning of the pandemic.
Central banks worldwide have raised borrowing costs significantly from near zero during the COVID-19 crisis, initially due to supply chain disruptions caused by the pandemic and later because of the full-scale invasion of Ukraine by Russia, which led to higher energy prices.
“Years of high inflation have had an impact, with prices still significantly higher than they were four years ago,” Darren Jones, a senior official at the U.K. Treasury, commented in response to Wednesday’s data.
Most economists predict that the bank will keep borrowing costs unchanged after the latest policy meeting on Thursday, as a majority of the nine-member Monetary Policy Committee (MPC) remain concerned about inflation in the vital services sector.
The data released on Wednesday showed that services sector inflation, a key indicator of domestic price pressures, rose to 5.6% in August from 5.2% in July.
One contributing factor to this increase was a 22.2% jump in airfares between July and August. While fare hikes during this period are common, the statistics office noted that this was the second largest increase recorded since 2001.
“This increase was offset by lower gasoline prices and reduced costs at restaurants and hotels,” explained Grant Fitzner, chief economist at the ONS.
Despite this, economists believe that the central bank is likely to cut rates again in November following the government’s budget announcement on October 30.
“A pause in interest rate cuts was already anticipated, and today’s data solidifies that expectation,” stated Ruth Gregory, deputy chief U.K. economist at Capital Economics research group.
“We expect the next rate cut of 25 basis points to occur in November.”
The new Labour government has highlighted the need to address a £22 billion ($29 billion) deficit in public finances, indicating that tax increases and spending cuts may be necessary, potentially impacting the short-term prospects for the British economy and exerting downward pressure on inflation.
“A rate cut on Thursday appears increasingly unlikely, as the majority of the Monetary Policy Committee is likely to assess the impact of next month’s budget before making further policy adjustments,” Suren Thiru, economics director at the Institute of Chartered Accountants in England and Wales, remarked.
Central banks globally have begun cutting interest rates as inflation rates have declined from multi-decade highs.
The U.S. Federal Reserve is expected to cut rates for the first time in four years later on Wednesday, possibly by as much as half a percentage point. Recent data showed inflation at 2.5% in the U.S. and 2.2% in the eurozone, representing the slowest increases since 2021.
Following the publication of the data, the pound gained strength against the dollar, and investors reduced their expectations of a rate cut by the BoE on Thursday to roughly a 26% likelihood, down from over one in three on Wednesday.
Rate futures indicate that investors still anticipate two quarter-point rate cuts by the end of 2024.
The BoE has signaled a cautious approach to further reductions in light of gradually slowing wage growth, a significant driver of inflation in the services sector.
Despite the overall acceleration in services prices, economists noted that the trend in the sector, excluding volatile items like airfares, continued to weaken.
“The underlying narrative is gradually improving, leading us to anticipate faster rate cuts through the winter, even though we do not expect any changes at the upcoming meeting,” said James Smith, U.K. developed markets economist at ING.
However, Luke Bartholomew, deputy chief economist at abrdn, suggested that BoE policymakers would focus on the sustained elevation of various measures of underlying inflation.
Core inflation, which excludes more volatile prices for energy, food, and tobacco, accelerated on a monthly and yearly basis.
“This explains why the Bank of England is likely to proceed more cautiously than the U.S. Federal Reserve in its easing cycle over the next few months,” Bartholomew commented.
The British Prime Minister Keir Starmer’s Labour government, aiming to accelerate economic growth, acknowledged that inflation was more manageable according to the data, although prices remained high. Inflation had surged to over 11% almost two years earlier, marking a four-decade high.
Separate data revealed that manufacturers’ costs for raw materials and energy declined by 1.2% annually in August, surpassing expectations. Factory selling prices increased by the smallest margin since January.
Source
Emil Kovács graduated from the Journalism program at Eötvös Loránd University in Hungary. During his journalism studies, he focused on data journalism, investigative reporting, and multimedia storytelling. He gained experience by writing for the university’s student newspaper, where he gained attention for his articles on social issues. After graduation, Emil began working as a reporter at a European news agency, where he conducts in-depth analyses of international news and current events.
