Economic indicators reveal that UK consumer prices stabilised in August, yet challenges remain.
- Core inflation, excluding volatile food and energy prices, unexpectedly increased to 3.6%.
- The Office for National Statistics attributes the rise primarily to soaring airfares.
- The Bank of England is anticipated to keep base interest rates unchanged at 5% in its upcoming meeting.
- Despite some easing in headline inflation, economic pressures continue to affect UK households.
In August, the United Kingdom’s inflation rate remained steady at 2.2%. This stability in consumer prices masks developments beneath the surface, particularly the rise in core inflation to 3.6%, surpassing expectations. The increase in core inflation marks a concerning trend, as it excludes the more volatile elements like food and energy prices.
The Office for National Statistics (ONS) has identified a significant rise in airfares, climbing by 11.9% year-on-year, as the primary factor contributing to the inflationary pressures experienced in August. Conversely, a decline in fuel prices by 3.4% played a pivotal role in maintaining the headline inflation rate’s stability.
Prices within the hospitality sector, including restaurants and hotels, increased at the slowest pace observed in three years, with a 4.4% rise. Meanwhile, goods prices dropped by 0.9%, maintaining their position within deflationary territory.
The upcoming meeting of the Bank of England’s Monetary Policy Committee (MPC) presents a crucial decision point. Economists predict that the bank will hold the base interest rate at 5%, acknowledging the expectation of only one more reduction in 2024, potentially lowering the rate to 4.75%.
Rising energy prices anticipated from October are likely to contribute further inflationary pressures. Services inflation, which escalated from 5.2% to 5.6%, alongside the increase in core inflation, may cause concern among more hawkish members of the MPC. Wage growth, previously a key driver of inflation, has begun to decelerate.
Despite the headline inflation’s apparent stability, economic pressures are tangible across the country. Darren Jones, the Chief Secretary to the Treasury, stated, “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.”
Ruth Gregory, Deputy Chief UK Economist at Capital Economics, reflects on the situation, indicating that the uptick in services inflation might eliminate the possibility of a near-term interest rate cut. Similarly, Yael Selfin from KPMG suggests that the recent data likely halts any immediate changes to the rates, reinforcing the expectation of stability in the bank’s forthcoming decisions.
Despite a stable headline inflation, underlying economic pressures signal potential challenges ahead for the UK economy.
