UK inflation rises to 2.2% in July

Inflation in the UK rose to 2.2% in July, marking the first increase this year. The Consumer Prices Index (CPI) inflation increased from 2% in June, below economists’ expectations of 2.3%.

While UK headline inflation ticked higher in July, to 2.2% from June's 2%, this is below the consensus forecast of 2.3% and should detract from the progress that continues to be made overall.
Specifically, British core inflation fell from 3.5% in June to 3.3%, while services…

— Mohamed A. El-Erian (@elerianm) August 14, 2024

The inflation rate remains above the Bank of England’s target of 2%, raising doubts about back-to-back rate cuts in September. CPI services price inflation dropped from 5.7% in June to 5.2% in July, which was more than expected.

Core CPI inflation (which excludes volatile food and energy) was moderate for the third straight month in a row in July. At an annual rate:

1 month: 2.0%
3 months: 1.6%
6 months: 2.8%
12 months: 3.2% pic.twitter.com/QtwkGJErC5

— Jason Furman (@jasonfurman) August 14, 2024

Grant Fitzner, the ONS’s Chief Economist, said, “Inflation ticked up a little in July, as domestic energy costs fell but not as much as last year. This was partially offset by hotel costs, which fell in July after strong growth in June.”

Policy makers will look through small headline rise to welcome sharp fall in services inflation – @LalithaTry responds to the latest @ONS prices data https://t.co/YdIP1sWfXr pic.twitter.com/Hd3advgqch

— Resolution Foundation (@resfoundation) August 14, 2024

The latest data indicates that prices continue to rise faster across the country compared to earlier this year, but the rate of increase is still slower than during the peak cost crisis in 2022 and 2023.

UK #inflation edged up from 2.0% to 2.2% in July, but this was a bit less than feared given the base effects (energy bills fell by less than they did last year).

The 'core' rate (ex. food & energy) fell by more than expected, from 3.5% to 3.3%, and services from 5.7% to 5.2% 👍

— Julian Jessop FRSA (@julianHjessop) August 14, 2024

Earlier in August, the Bank of England’s monetary policy committee voted to cut interest rates by a quarter point to 5%.

Inflation rise challenges policy plans

Economists now predict that the slight uptick in inflation might lead the Bank to hold off on further rate cuts temporarily while expecting additional cuts before the end of the year. Ruth Gregory, Deputy Chief UK Economist at Consultancy Capital Economics, commented, “The smaller-than-expected rise in CPI inflation and the sharp fall in services inflation to a two-year low will reassure the Bank of England that the disinflation process is on track and opens the door to more interest rate cuts later this year.” Sarah Coles, Head of Personal Finance at Hargreaves Lansdown, noted that the inflation rise is “not massively welcome” for those hoping to benefit from wage increases but is also “not a huge upset.” Luke Bartholomew, Deputy Chief Economist at fund manager Abrdn, suggested that the fall in services inflation should reassure policymakers that inflation pressures might not be as persistent as initially feared. “The ongoing slowing in inflation pressure means there is certainly scope for at least one more rate cut this year,” he added. The Bank of England has predicted that inflation will rise to about 2.75% in the second half of this year due to persistent price increases in the service sector. However, it expects inflation to fall back to 1.7% in 2026 and further down to 1.5% in 2027. Darren Jones, Chief Secretary to the Treasury, emphasized the government’s commitment to addressing the cost of living challenges: “The new government is under no illusion as to the scale of the challenge we have inherited, with many families still struggling with the cost of living. That is why we are taking the tough decisions now to fix the foundations of our economy so we can rebuild Britain and make every part of the country better off.”