The UK’s inflation rate has risen for the first time this year, as revealed by the latest official figures. Prices increased by 2.2% in the year to July, which is slightly above the Bank of England’s target rate of 2%. This target had been maintained since May, and the recent rise marks a shift from the steady inflation rate seen earlier in the year.
This uptick in inflation was widely predicted and is largely due to gas and electricity prices falling by less than they did a year ago. Despite the rise, it is still lower than many economists had anticipated. The slower decrease in energy costs compared to the previous year has contributed to the higher inflation rate.
While prices are now rising faster across the UK than in recent months, the current rate of increase remains more moderate compared to the sharp rises experienced in 2022 and 2023. During those years, households faced significant financial pressure from higher energy and food bills. The recent figures indicate that, although inflation is up, it has not yet reached the severe levels of the previous years.
The Bank of England has forecasted that inflation, which tracks the rate at which prices rise, is expected to increase to 2.75% in the coming months. This anticipated rise in inflation is projected to be followed by a decrease to below 2% next year. This forecast reflects ongoing adjustments to economic conditions and the Bank’s broader monetary policy objectives.
Before the Bank’s next rate-setting meeting on 19 September, additional economic data will be reviewed, including new inflation figures as well as updates on employment and wage growth. The Bank had previously implemented a series of interest rate hikes to combat high inflation. However, last month, it decided to cut the interest rate from 5.25% to 5%, marking the first reduction in rates since the onset of the pandemic.
Higher interest rates can be advantageous for savers, as they typically yield better returns on savings. Conversely, these rates can also result in increased costs for mortgages and other forms of credit, placing a higher financial burden on consumers. The balance between these effects is a key consideration for the Bank as it continues to navigate economic challenges.
‘September cut not off the table’
Experts have been forecasting additional rate cuts this year, with investors increasingly expecting the Bank of England to implement a reduction in its September meeting. Sanjay Raja, chief UK economist at Deutsche Bank Research, commented that a rate cut in September is now a strong possibility, and suggested that multiple cuts could occur throughout the year.
On the other hand, Ruth Gregory, deputy chief UK economist at Capital Economics, noted that the latest data might not fully address the Bank’s concerns about ongoing inflationary pressures. The Bank of England also monitors inflation in the services sector when making rate decisions. Although prices in this sector slowed to 5.2% in July, this decrease was influenced by the fluctuating costs of airfares and hotel stays.
Gregory also anticipates that the Bank will lower its main interest rate further this year, projecting a drop to 4.5% from the current 5%. This move would be part of a broader strategy to manage economic conditions and inflationary trends.
Interest rate cuts could provide relief for businesses that have faced high rates and inflation in recent years. Livia Marrocco, who owns Marrocco’s restaurant and ice cream shop in Hove, shared with the BBC that rising costs for products and ingredients have led her to increase prices slightly. Despite these challenges, she has noticed an improvement recently, as the good weather and school holidays have boosted customer numbers.
Inflation had surged to 11.1% due to the Ukraine war and supply chain disruptions caused by the pandemic, which significantly increased the cost of living. However, it had been declining steadily until June, as the Bank of England raised interest rates to reduce consumer demand.
Grant Fitzner, chief economist at the Office for National Statistics (ONS), explained that inflation increased slightly in July. This rise was due to domestic energy costs falling less than they did a year ago. This was somewhat balanced out by a decrease in hotel costs, which fell in July after experiencing significant growth in June.
Mr Fitzner also mentioned on the BBC’s Today programme that underlying price increases were under control, noting that services inflation decreased in July and food prices remained steady. He indicated that this suggests inflation pressures are relatively moderate in the short term.
The Institute for Fiscal Studies reported that food and drink prices rose by 28.4% between September 2021 and September 2023. Their latest analysis showed that lower-income households experienced a larger increase in food bills compared to wealthier households, as the most significant price hikes affected cheaper brands. However, according to the Office for National Statistics (ONS), food price inflation eased to 1.5% in July.
Darren Jones, chief secretary to the Treasury, acknowledged that the new Labour government is fully aware of the ongoing challenges for households. Meanwhile, shadow chancellor Jeremy Hunt stated that the latest figures indicate more needs to be done to manage inflation effectively.
The possibility of further interest rate cuts could lead to increased borrowing and a boost in housing market activity. Recent figures from the Office for National Statistics (ONS) indicate that house prices have been rising, though these figures are from before the recent interest rate cut in August.
According to the ONS, UK property prices rose by 2.7% in the year ending in June. In England, house prices increased by 2.4%, bringing the average price to over £300,000. Specifically, the average cost of a home in England reached £305,000, compared to £216,000 in Wales, £192,000 in Scotland, and £185,000 in Northern Ireland.
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