Anika Begay
By David Milliken
LONDON (Reuters) – British consumer price inflation rose for the first time this year in July, official data showed on Wednesday, but the rise was weaker than expected as prices for services, closely watched by the Bank of England, rose less rapidly.
The annual rate of consumer price inflation rose to 2.2% after two months of the Bank of England holding its 2% target, the Office for National Statistics said, coming in slightly below the 2.3% median forecast in a Reuters poll of economists.
Sterling fell sharply against the US dollar after the data was released and financial markets had priced in a 44% chance of a quarter-point rate cut by the BoE in September, up from 36% before the data was released.
When the BoE cut interest rates from a 16-year high of 5.25% earlier this month, it said inflation data of 2% in May and June likely marked a low point for inflation.
The central bank had forecast the consumer price index would rise to 2.4% in July and settle around 2.75% by the end of the year, as the impact of sharp drops in energy prices fades in 2023, before returning to 2% in the first half of 2026.
“Today’s data will give the Bank’s Monetary Policy Committee some confidence that domestic price pressures are less likely to hinder a sustainable return to the 2% target,” said Martin Sartorius, chief economist at the Confederation of British Industry.
UK inflation hit a 41-year high of 11.1% in October 2022, driven by soaring energy and food prices following Russia’s full-scale invasion of Ukraine, as well as labour shortages and supply chain disruptions due to COVID-19.
Consumer price inflation is still lower than in the euro zone, where the European Central Bank cut interest rates in June, and the United States, where the Federal Reserve is expected to start cutting rates next month.
Nonetheless, many families continue to feel squeezed by the sharp rise in prices over the past two years.
Responding to the data, Deputy Finance Minister Darren Jones stuck to the newly elected Labour government’s argument that the data shows the government has inherited a difficult economic legacy and that tough decisions will need to be made to improve the situation.
HOTEL COSTS ARE DECREASING
The BoE remains relatively focused on longer-term inflationary pressures, including services prices and wages, as well as general weakness in the labour market.
Data on Wednesday showed annual services price inflation fell to 5.2% in July from 5.7% in June, below all forecasts in a Reuters poll and to the lowest level since June 2022. BoE staff had forecast a decline to 5.6%.
The decline in services price inflation reflects a reversal of June’s sharp rise in hotel costs, as well as downward pressure from airfares, roadside assistance, package holidays and cultural services, including live music.
Many economists have attributed part of June’s price rise to concert tours in Britain, including that of US singer Taylor Swift, although the ONS said it could not establish a clear link.
Official data on Tuesday showed that annual growth in wages excluding bonuses slowed to a two-year low of 5.4%, in line with economists’ forecasts but still nearly double the rate the BoE says is consistent with the 2% consumer price index (CPI).
However, the figures also showed a surprising fall in unemployment, albeit based on a survey under revision, and economists said the BoE was likely to remain cautious in cutting rates, even after today’s inflation data.
“Absent a material shock to growth, this cycle of cuts will likely be gradual, most likely quarterly. Investors counting on imminent rate cuts will therefore be disappointed,” said Aaron Hussein, global market strategist at JP Morgan Asset Management.
Financial markets have priced in a further 0.49 percentage point of cuts from the BoE over the remainder of the year, up from 0.46 percentage points before the data was released.
