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'Sticky UK inflation leaves November rate cut hanging in the balance' – ING
At 3.8%, the latest UK inflation data certainly isn’t welcome news for the Bank of England ahead of its decision on Thursday, where it’s widely expected to leave rates on hold, said James Smith, developed markets UK economist at ING.
Yet the latest data doesn’t dramatically move the needle one way or another on the prospect of a further rate cut later this year.
Inflation is more or less at a peak, though it’s likely to stay in the 3.5-4% area for the rest of this year.
Rising food inflation is a particular bugbear of the Bank of England. Yet we aren’t in the camp that thinks rate cuts are over, given the prospect of further progress in services inflation and wage growth.
Food inflation nudged above 5%, as both we and the BoE had anticipated. That’s a particular bugbear of officials right now, given the formative role food prices play in inflation expectations, but also because of the correlation with restaurant/café prices.
Catering makes up 40% of the Bank’s preferred measure of “core services” inflation, which gauges the segment of the inflation basket most intrinsically linked to the underlying performance of the UK economy. Inflation in the hospitality sector has been stuck around 4% this year, which we think is linked to pressure from April’s payroll tax and National Living Wage hikes.
While services inflation slowed to 4.7% from 5%, this was mainly because of volatile air fares. The core services basket stayed at 4.2%, Smith calculated.
However, we think there is still scope for services inflation to undershoot the Bank’s forecasts further in the next release for September. And more broadly, we are seeing a significant easing in rental growth, which is set to be a significant source of service sector disinflation over the coming months.
If we’re right about that, it would tip the balance slightly more in favour of a November rate cut, which we still narrowly expect. Certainly, we aren’t in the camp that thinks rate cuts are over. Services inflation should show more visible progress next spring, while wage growth should ease below 4% by year-end. Add in the fact that the late-November autumn Budget is likely to be dominated by tax rises, and we think there’s still a decent case for UK interest rates to fall two or three more times by next summer.
Price growth for services, which is closely watched by the Bank of England, has slowed to 4.7% from 5% in July, while goods inflation ticked up to 2.8% from 2.7%.
Sanjay Raja, chief UK economist at Deutsche Bank, said:
The good news is that August inflation data has corrected some of the upside surprise we saw last month. The bad news is that CPI has maybe a little further to go before hitting its peak. Indeed, food inflation continues to push higher – though survey data suggest that we may be nearing the peak on this front too. And despite better services data this morning, inflation in the largest basket remains sticky. To be sure, there are some encouraging bits of information in today’s report – and we will need to see more of this for the Bank of England to cut Bank Rate again.
This is why we continue to see a slightly longer pause when it comes to the Bank’s next rate move. For us, the MPC [monetary policy committee] may want to wait for a larger accumulation of evidence before dialling down restrictive policy again. Seeing the downtrend in CPI begin could assuage fears on the committee that the hump in inflation is not turning into a plateau.
Analysts say that climate change is clearly affecting food prices and making them harder to control.
Tom Lancaster, land, food and farming analyst at the Energy and Climate Intelligence Unit, said:
Food price inflation is once again up, after the hottest spring and summer on record has hit UK farmers ability to grow crops and feed their animals, with the UK again facing one of its worst harvests in decades.
Although this extreme weather will only be part of the story in these price rises, the signature of climate change is clear. And it’s not just British grown foods such as beef, milk and vegetables that are rising, but also prices for food and drink like chocolate and coffee too, both driven up by extreme weather linked to climate change.
Central banks are clear that climate change increases food prices in ways they cannot control or predict, creating systemic risk to our food system. There is no monetary policy lever they can pull to address this. Only by reducing our emissions to net zero and bringing balance back to our climate will we limit the impact of climate change on food prices in the future.
Food prices rise at fastest rate since January 2024
Food prices rose for the fifth month in a row – after the hottest spring and summer on record which damaged harvests – to an annual rate of 5.1%, up from 4.9% in July and the highest since January.
Vegetables, milk, cheese and fish became more expensive, while bread and cereals and oil and fats became cheaper.
Air fares rose by less than last year.
Ticket prices were up by 2.1% between July and August, compared with a rise of 22.2% at this time last year. This was due to the different timing of flights in relation to school summer holidays, particularly return flights from Europe. Last year, these return flights from Europe fell during the school term in July, but this year they were during the school holidays in July, making them more expensive this year.
This was offset by higher prices at restaurants and hotels, and fuel costs. Prices at restaurants and hotels rose by 3.8% year on year in August, up from 3.4% in July.
The biggest upward effect came from accommodation providers, especially from overnight hotel stays priced the previous day, where prices fell this year by less than an ear ago. There was also a smaller upward effect from canteens.
The average petrol price rose by 0.3p a litre between July and August to 134.2p, compared with a fall of 2.1p a litre last year. Similarly, diesel prices rose by 0.8p per litre to an average of 142.p, against a 2.6p per litre drop last year.
Rachel Reeves, the chancellor, said:
I know families are finding it tough and that for many the economy feels stuck. That’s why I’m determined to bring costs down and support people who are facing higher bills.
Through our Plan for Change we are taking action — raising the National Living Wage, extending the £3 bus fare cap, and expanding free school meals, to put more money in people’s pockets while we work to build a stronger, more stable economy that rewards hard work.
Introduction: UK inflation stayed at 3.8% in July
Good morning, and welcome to our rolling coverage of business, the financial markets and the world economy.
UK inflation stayed steady last month, keeping households under pressure with petrol prices rising.
The annual rate of inflation, as measured by the consumer prices index, remained at 3.8% last month, the same as in July, according to the Office for National Statistics. This was in line with what economists had predicted.
Air fares rose by less than year while prices at restaurants and hotels, and for petrol and diesel, were higher.
The core rate of inflation, which strips out volatile energy and food costs, fell to 3.6% in July, also as forecast by economists.
With growing inflationary pressures, financial markets are widely predicting the Bank of England will keep interest rates unchanged at 4% on Thursday. Inflation is nearly double the central bank’s target of 2%.
Donald Trump landed at London Stansted last night for an unprecedented second state visit to the UK.
The US president and the first lady, Melania Trump, touched down onboard Air Force One ahead of a series of events over the next two days, including being hosted by King Charles, military parades and a possible flypast by the Red Arrows alongside British and American F-35 jets.
It comes amid criticism in the UK of Trump’s policies and rhetoric, with the Stop Trump Coalition gathering for a protest in Windsor on Tuesday and the group planning another demonstration in central London on Wednesday.
Writing in the Guardian, the London mayor Sadiq Khan accused the US president of doing more than anyone else to “fan the flames of divisive, far-right politics around the world in recent years”.
Later today, the US Federal Reserve announces its latest interest rate decision. It is widely expected to cut rates by a quarter point to 4.25%.
The Agenda
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8.30am BST: ECB president Christine Lagarde speech
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10am BST: Eurozone inflation for August (final)
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1.30pm BST: US Housing starts for August
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2.45pm BST: Bank of Canada interest rate decision
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7pm BST: US Federal Reserve interest rate decision (forecast: quarter-point cut to 4.25%)
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7.30pm BST: Fed press conference
