August saw the UK inflation rate maintain its position at 2.2%, surprising many with core inflation climbing to 3.6%.
- The rise in core inflation exceeded expectations, suggesting persistent underlying price pressures despite stable headline rates.
- Airfare costs surged by 11.9% year-on-year, identified as the key component driving the August inflation figures.
- The Bank of England is expected to keep the interest rate at 5% in their upcoming decision, with potential gradual cuts anticipated.
- Economists predict that rising energy costs may pose further inflationary challenges, despite easing wage growth pressures.
August witnessed stability in the UK’s headline consumer price index, holding steady at 2.2%, yet core inflation—which excludes volatile categories like food and energy—rose significantly to 3.6%, surpassing the anticipated 3.5%. According to the Office for National Statistics (ONS), the primary factor behind this uptick was a striking 11.9% increase in airfares compared to the previous year.
While there was a notable decrease in fuel prices by 3.4%, which contributed to the stability in overall inflation rates, the cost of dining in restaurants and staying in hotels saw the lowest growth in three years, marked by a 4.4% rise.
In anticipation of the Bank of England’s Monetary Policy Committee meeting, there is wide belief that the base interest rate will remain unchanged at 5%. After implementing its first interest rate reduction in four years earlier this summer, the Bank is foreseen to continue this trend with cautious future cuts, expecting another reduction in 2024 to adjust the rate to 4.75%.
Despite the stability seen in overall inflation, the rise in core and services inflation, which jumped from 5.2% to 5.6%, poses potential concerns for more conservative members of the Monetary Policy Committee. On the contrary, goods prices experienced a deflationary trend with a 0.9% reduction over the last year.
Projections from economists indicate that the energy price increments commencing in October could amplify inflationary pressures as the year progresses. Meanwhile, wage growth, once a significant inflation driver, has begun to moderate. Darren Jones, the government’s Chief Secretary to the Treasury, acknowledged these economic strains, stating that although inflation levels are more controllable now, numerous UK families remain under financial stress due to prolonged high prices.
Echoing these sentiments, Ruth Gregory from Capital Economics expressed that the rise in services inflation could potentially postpone any interest rate reductions in September. Similarly, Yael Selfin of KPMG reinforced the stance that the uptick in services inflation is likely to deter immediate interest rate cuts.
The UK inflation figures, reflecting a steady headline rate but rising core pressures, will likely influence monetary policy decisions moving forward.
