The UK’s inflation rate held steady at 2.2% in August, according to data released by the Office for National Statistics (ONS) on Wednesday.
This figure, unchanged from July, aligns with predictions made by economists in a recent Reuters poll.
The stable inflation rate leaves room for potential interest rate cuts by the Bank of England (BoE) later this year, though the central bank’s Monetary Policy Committee (MPC) is expected to maintain current rates in its upcoming decision.
Services sector inflation climbs to 5.6%, surpassing expectations
While overall inflation remained constant, the services sector saw an uptick in price pressures. Services inflation, a key indicator of domestic economic health closely monitored by the BoE, rose to 5.6% in August.
This increase surpassed economists’ projections of 5.5% and marked a significant jump from July’s 5.2% figure.
The rise in services inflation was primarily driven by a sharp increase in airfares, according to the ONS.
However, this upward pressure was partially offset by weakness in fuel prices and reduced charges from restaurants and hotels.
Core inflation, which excludes volatile food and energy prices, also saw an increase.
The measure rose to 3.6% in August, up from 3.3% in July, further highlighting the persistent nature of price pressures within the UK economy.
Interest rate decision looms as BoE weighs economic data
The inflation figures come at a crucial time, with the BoE’s MPC set to announce its latest interest rate decision on Thursday.
In August, the committee implemented its first rate cut in over four years, reducing the rate by a quarter point to 5%. However, the latest data suggests that the MPC may opt for a more cautious approach this time around.
Economists widely anticipate that the MPC will leave rates unchanged this week, citing the persistent price pressures in the services sector as a key factor in this decision.
Ruth Gregory, an economist at Capital Economics, stated:
A pause on interest rate cuts was already expected tomorrow and today’s release cements that view.
Despite the likelihood of a rate hold this week, many experts still foresee further cuts on the horizon. Gregory added, “We continue to assume the next [quarter] point rate interest rate cut will take place in November.”
Market reaction and future expectations
The release of the inflation figures had an immediate impact on financial markets.
Traders scaled back their bets on the possibility of an MPC rate cut on Thursday, with the probability dropping to approximately 25% from 35% prior to the data release.
This shift in expectations led to a slight strengthening of the pound sterling, which edged up 0.13% against the US dollar to $1.3178.
The BoE has maintained a cautious stance on inflation, hesitating to declare victory prematurely.
Inflation has now remained slightly above the central bank’s 2% target for two consecutive months, underscoring the delicate balance the MPC must strike between supporting economic growth and maintaining price stability.
Government response and ongoing economic challenges
Darren Jones, chief secretary to the Treasury, acknowledged the impact of prolonged high inflation on UK households.
“Years of sky-high inflation have taken their toll; and prices are still much higher than four years ago,” Jones stated.
He added:
So, while more manageable inflation is welcome, we know that millions of families across Britain are struggling.
The government’s response highlights the complex economic landscape facing the UK.
While the stabilization of inflation rates provides some relief, the lingering effects of previous price surges continue to affect many citizens.
Policymakers face the challenge of navigating these economic headwinds while working to support recovery and growth.
As the BoE prepares to make its interest rate decision, all eyes will be on how the central bank interprets the latest inflation data.
The combination of steady overall inflation with rising services sector prices presents a nuanced picture, likely requiring careful consideration from MPC members.
The coming months will be crucial in determining the trajectory of UK inflation and the broader economic outlook.
With potential interest rate cuts on the horizon, businesses and consumers alike will be closely monitoring economic indicators for signs of sustained recovery and price stability.
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