UK inflation unchanged at 2.2%

The Bank of England is expected to keep interest rates on hold on Thursday after annual inflation in the UK held steady at 2.2 per cent in August.

Official figures show that annual consumer prices were stable between July and August, when measured on an annual basis, defying some expectations of a slight increase to 2.3 per cent. The Bank, which cut interest rates in August, targets a CPI rate of 2 per cent.

A closely watched measure of core inflation, which strips out volatile elements such as food and energy, accelerated from 3.3 per cent to 3.6 per cent — higher than the 3.5 per cent forecast by economists. Services inflation, monitored by the Bank’s Monetary Policy Committee, jumped from 5.2 per cent to 5.6 per cent in August, and goods prices remained in deflationary territory, falling by 0.9 per cent over the year.

The Office for National Statistics said that air fares were the biggest drivers of price growth last month, rising by 11.9 per cent on the year and by 22 per cent between July and August, having fallen the previous year. Downward inflationary pressures came from a 3.4 per cent decline in fuel inflation, while prices in restaurants and hotels rose by 4.4 per cent, the lowest rate in three years.

Food price inflation also dipped from 1.5 per cent to 1.3 per cent over the year, and alcohol and tobacco price rises slowed from 7.2 per cent to 5.7 per cent, the ONS said. The UK’s headline rate of inflation is now the same as that in the eurozone at 2.2 per cent and lower than the 2.5 per cent recorded in the United State last month.

The pound gained 0.4 per cent against the dollar to $1.321 on Thursday, whilst bond yields rose as investors bet on no changes to UK monetary policy until November. The FTSE 100 declined by 0.45 per cent and the FTSE 250 was down by 0.6 per cent in afternoon trading.

The absence of any major inflationary surprises last month means the nine-strong MPC is widely expected to keep the base rate unchanged at 5 per cent on Thursday. The MPC loosened policy for the first time in four years this summer but is expected to gradually cut borrowing costs this year. Markets expect only one more rate reduction in 2024 to take the base rate to 4.75 per cent.

The inflation figures “justify a cautious approach to monetary policy”, Dani Stoilova, economist at BNP Paribas said. “We continue to expect that the MPC will vote to hold Bank rate steady at 5 per cent, keeping its guidance unchanged and signalling that there is no preset path for policy going forward.”

Economists expect a 10 per cent rise in energy prices from next month to keep inflation creeping higher for most of the year by about 0.5 per cent, while previous sources of price pressures such as wages have started falling.

Ruth Gregory, deputy chief UK economist at Capital Economics, said a rate cut of a quarter of a percentage point was likely in November “and rates will be cut at alternative Bank meetings until June [2025]” she said.

At least two dovish members of the MPC, Sir Dave Ramsden and Swati Dhingra, may still vote for a reduction in the base rate to 4.75 per cent, but they are likely to be out-voted by a majority of the committee, including Andrew Bailey, Bank governor.

Darren Jones, the government’s chief secretary to the Treasury, said: “Years of sky-high inflation have taken their toll and prices are still much higher than four years ago. While more manageable inflation is welcome, we know that millions of families across Britain are struggling, which is why we are determined to fix the foundations of our economy so we can rebuild Britain and make every part of the country better off.”