UK inflation at 18-month high as food, transport costs soar
Consumer prices rose 3.8% from a year earlier, up from 3.6% in June and the fastest pace since January 2024
[LONDON] UK inflation climbed to an 18-month high on the back of surging food, fuel and transport prices, putting the Bank of England under pressure to reconsider the pace of interest-rate cuts.
Consumer prices rose 3.8 per cent from a year earlier, up from 3.6 per cent in June and the fastest pace since January 2024, the Office for National Statistics (ONS) said on Wednesday (Aug 20). The pickup was forecast by the BOE but exceeded the 3.7 per cent economists were predicting.
Services inflation, a closely watched gauge of underlying prices pressures, climbed to 5 per cent, above the BOE’s 4.9 per cent forecast. The pound erased a drop after the report to trade little changed at US$1.3502.
The July reading does little to settle the debate within the BOE over the path of policy after the tightest of decisions this month when rates were cut a quarter point to 4 per cent and governor Andrew Bailey warned of “genuine uncertainty” about the next move.
The central bank expects inflation to peak at 4 per cent in September, double its 2 per cent target, on the back of higher food costs but to drop back after that. July’s increase was also driven by what may prove to be temporary factors, including the biggest jump in air fares in 24 years due to the timing of the summer holidays, and moves in global food commodity markets.
Policymakers will have to balance the risk of sticky inflation as the British public, scarred by three years of sharply increasing prices, demand compensating wage rises against fears the economy is stuttering and the BOE’s own forecast that inflation will ease.
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The pickup in services and food prices will increase “fears of inflation persistence at the Bank of England”, according to S&P Global Market Intelligence economist Raj Badiani. “This will harden the assessment of several members of the MPC. They are likely to voice concerns that interest rates are falling too rapidly.”
Money markets kept wagers on BOE interest-rate cuts broadly steady, seeing around a 40 per cent chance of another reduction by year-end. A full quarter-point cut had been expected earlier this month. Gilts pared earlier gains, leaving the the two-year yield lower by one basis points at 3.97 per cent, while the 10-year yield was flat at 4.74 per cent.
Traders have curbed their bets on future rate cuts since the narrower-than-forecast decision on Aug 7 saw some policymakers warn of the risk of second-round effects on wages and prices as consumers try to recover lost spending power. Subsequent figures showing the economy and labour market holding up better than feared have added to the case for caution. Policymakers will have two more months of data to consider before deciding whether to continue their once-a-quarter rate-cutting path in November.
The figures add to evidence that firms are responding to Chancellor of the Exchequer Rachel Reeves’ bumper tax and minimum-wage increases in April by passing on the billions of pounds in extra costs to consumers. Food and non-alcoholic drink prices, which shape inflation expectations more than other consumer items, rose 4.9 per cent on the year, the fastest pace since February 2024. The increase was driven by beef, chocolate, orange juice and coffee, suggesting global factors are also at play.
Higher inflation undermines Prime Minister Keir Starmer’s promise to improve living standards for “working people” during Labour’s first term. Instead, a recovery in real incomes is fizzling out as resurgent inflation collides with a cooling labour market, with Reeves’ tax-raising budget in October blamed by critics for causing both.
Commuters will be hit hard as rail fares are now due to rise 4.8 per cent next year, under the arrangement that they increase in line with the July reading for the retail prices index of inflation.
Reeves said: “We’re a long way from the double-digit inflation we saw under the previous government, but there’s more to do to ease the cost of living.”
The ONS said the monthly increase in air fares was the biggest since comparable records began in 2001 and was likely to have been due to the timing of the school holidays. They rose 30.2 per cent between June and July, compared with 13.3 per cent in 2024.
The higher cost of fuel also lifted inflation and hotels and restaurant prices were 3.2 per cent higher in the year to July, up from 2.6 per cent in the 12 months to June. The ONS said there was no evidence that the Oasis reunion tour had affected the numbers.
“Excluding airfares, package holidays and education – a measure the BOE has in the past called ‘core’ services inflation – as well as accommodation services, which tend to be volatile, annual services inflation eased to 4.9 per cent from 5.1 per cent in June, based on our estimates,” Hanson and Andrade said.
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