The inflation rate rose to 2.2 per cent in July, slightly up from the Bank of England’s target of 2 per cent, where the rate sat in May and June. It’s the first rate uptick this year – and though widely expected, it will be used to explain why the Bank’s continued hawkish stance, despite starting its rate-cutting process earlier this month.
The slight speed up in the inflation rate is largely attributed to the overall cost of household services, where the ‘prices of gas and electricity fell by less than they did last year’. This was somewhat offset by the ‘largest downward contribution’ which was attributed to falling costs for restaurants and hotels. But that wasn’t enough to stop the rate from increasing slightly, raising further questions about when the next interest rate cut might come.
The uptick is not a surprise. Inflation has been widely forecast to rise in the second half of this year – though these increases are in no way comparable to the earlier inflation crisis experienced worldwide. At the beginning of the month, when Threadneedle Street opted for a small rate cut of 0.25 percentage points, the Bank’s own forecast showed inflation rising ‘slightly towards the end of the year, to 2.75 per cent’ – then falling back down ‘to 1.7 per cent in two years’ time and to 1.5 per cent in three years.’
This small uplift, largely attributed to flux in energy prices, was already factored in by the Bank when it decided to start cutting rates, and should not – in theory – stop the BoE from continuing to cut rates in the autumn, even if it decides to hold rates at its next meeting in September. But the headline inflation rate is only one (albeit important) part of the equation. As Ross Clark pointed out yesterday, the latest wage growth data has also stabilised, which should allow for more rate cuts, but Chancellor Rachel Reeves’s first big spending decision – to grant inflation-busting pay rises across the public sector – is bound to give members of the Monetary Policy Committee some pause, and it will feel bound to assess any potential inflationary impact of those pay boosts.
All that said, the details in the data today will have the Bank feeling confident it made the right decision earlier this month.
While the inflation rate did increase slightly, the rise was smaller than markets had been predicting (the consensus was closer to 2.3 per cent). Capital Economics reports this morning that the data ‘opens the door to more interest rate cuts later this year’ thanks to a long-awaited slowdown in the services rate, which slowed from 5.7 per cent in the year to June to 5.2 per cent to July. This number has been especially sticky – and has been part of the broader story about why the Bank held off on a rate cut in the first half of the year. Its movement further suggests that the Bank will see a return to its 2 per cent target soon enough, even if there is a slight uptick over the next few months.
The government won’t be too concerned about this morning’s update, not least because it’s benefitting from the start of the rate-cutting process, which is happening regardless of a small rate rise. The Chief Secretary to the Treasury Darren Jones notes this morning that the Treasury is ‘under no illusion as to the scale of the challenge we have inherited’. But compare the inflation rate to what the last Prime Minister inherited – Rishi Sunak took over with inflation in the double digits – and it serves as another reminder that, slowly but surely, economic conditions are improving.
Hear Kate's analysis on today's Coffee House Shots podcast:
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