UK INFLATION STICKS AT 2.2%
Newsflash: UK inflation remained unchanged last month, above the UK’s official target.
The Consumer Prices Index, which tracks cost changes across the economy, rose by 2.2% in the year to August, data just released by the Office for National Statistics shows.
That means prices are rising a little faster than the Bank of England’s target of 2%.
Key events
The pound has risen this morning, as the odds of a surprise interest rate cut tomorrow fade.
Sterlging has gained almost a third of a cent against the US dollar to $1.319, towards the one-week high it touched yesterday.
Today’s UK CPI inflation figure inline with expectations but sticky services inflation points to rates on hold at next meeting rather than a cut. US rate cuts likely to be more aggressive than U.K. which makes for a strengthening GBP v Dollar.
— Jason Hollands (@jasonhollands) September 18, 2024
Daniel Casali, chief investment strategist at wealth manager Evelyn Partners, says:
The broader trend of lower UK inflation should encourage the BoE to cut interest rates this year, but at a relatively slower pace compared to the US. Potentially, this should provide upside for the sterling exchange rate against the US dollar.
There is some good news for households and the Bank of England in today’s inflation report, says Sanjay Raja, chief UK economist at Deutsche Bank Research:
But, today’s data won’t be enough to trigger a surprise UK interest rate cut tomorrow, Raja predicts, explaining:
Headline CPI came in line at 2.2% y/y. But core CPI edged higher to 3.59% y/y, and services CPI ticked higher to 5.56% y/y – both a tenth above our own projections.
The strength in services inflation came down to stronger than expected airfares, which shot up 22% m/m, offsetting the bigger fall in accommodation prices. The good news is that despite the stronger services and core goods prints, food and energy inflation surprised to the downside.
Today’s UK inflation report “cements” the view that the Bank of England will pause tomorrow and leave interest rates unchanged, says Ruth Gregory, deputy chief UK economist at Capital Economics.
She adds:
We continue to assume the next 25 basis point rate interest rate cut will take place in November and that rates will be cut at alternative BoE meetings until June.
Chart: UK inflation
On the face of it, today’s inflation rate of 2.2% gives the BoE confidence towards lowering interest rates further this year.
But, says professor Costas Milas of the University of Liverpool, it’s not that simple. He argues that recent public sector pay deals could push up inflation.
He tells us:
Services inflation, a good proxy for domestic pressures has gone up to 5.6% in August.
I still believe that the latest public sector wage increases of 5.5% (plus ) will push up services inflation (and therefore CPI inflation) further within the next 9 months as I pointed out in a recent London School of Economics Business blog. This suggests the Bank’s MPC should, for the time being, keep interest rates unchanged.
There is an extra reason for doing so, he adds:
The Fed is largely expected to lower US interest rates by 25 to 50 basis points this week. Academic research points out to significant positive spillover effects to international growth (including the UK one) from such a cut since it will look “co-ordinated” with the recent interest rate cut by the ECB.
In short, the BoE could allow for cuts in international interest rates to strengthen UK growth without taking action itself!
Darren Jones: millions of families are struggling
It’s important to remember that although the rate of price rises has slowed this summer, the level of prices is sharply higher than before the cost of iving crisis began.
Darren Jones, chief secretary to the Treasury, makes this point:
“Years of sky-high inflation have taken their toll; and prices are still much higher than four years ago.
“So, 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.”
Ian Stewart, chief economist at Deloitte, isn’t ruling out a cut to UK interest rates tomorrow.
Stewart says:
“The big picture in the UK is of receding inflation pressures. While core inflation nudged higher in August, softer wage growth and falling commodity prices suggest that this will reverse in coming months.
With UK growth flatlining in June and July, and the Federal Reserve looking set to reduce US interest rates today, the Bank of England may well follow suit at their rate setting meeting tomorrow.”
At 2.2%% in August, inflation in the UK was running at the same rate as France.
Germany, though, saw a lower inflation rate of 2% last month.
Jake Finney, economist at PwC, explains why we didn’t see a Taylor Swift-powered jump in hotel prices last month (see earlier post):
“The main area of concern continues to be services inflation, which increased from 5.2% to 5.6%. The Taylor Swift effect might not explain the whole story this time, as most of the inflation data for this month was collected on or around the 13 August, which does not coincide with any of the Eras tour dates.
However, it could help to explain part of the upward rise in ‘Cinemas, theatres and concerts’ price inflation, which more than doubled, from 4.4% to 9.2%.
The Resolution Foundation predicts the Bank of England will leave rates unchanged tomorrow.
They say:
CPI inflation held steady in August, with the second-biggest monthly rise in airfares on record (since 2001) and slower falls in second-hand car prices offset falls in hotels and restaurant prices. Disappointingly, the closely-watch services inflation rose to 5.6 per cent after a surprise dip last month.
And that means the Bank is likely to leave interest rates on hold at 5%, argues Lalitha Try, economist at the Resolution Foundation:
“Inflation held steady in August, with even Taylor Swift’s arrival in London failing to move the dial on price changes. Disappointingly, services inflation rose after a surprise fall in July, with prices now back in line with the Bank’s expectations.
“Amid a busy period for central banks, with the Fed gearing up for its first interest rate cut in years following a cut by the ECB last week, it’s likely to be a steady-eddie week for the Bank of England.”
The head of the TUC, general secretary Paul Nowak, argues that the Bank of England should cut UK interest rates tomorrow.
Nowak says a rate cut would help the economy;
“With inflation unchanged and broadly at target, and GDP growth at zero for three of the last four months, the time is right for the Bank of England to make another rate cut.
“Households are in desperate need of relief, with several years of steep price rises coming on top of the longest pay squeeze in modern history.
“Inflation is now falling across most high-level categories, and the economy needs the boost that a further rate cut would bring.
“The new government’s plans for growth are welcome.
“Long-overdue investment will revitalise UK industry, start to address the Tories’ manufacturing decline and help deliver good jobs and improve pay.
“But rate setters need to do their bit too.”
Odds of an interest rate cut tomorrow fall
The Bank of England is less likely to cut interest rates tomorrow, the City believes, after this morning’s inflation report showed a rise in core inflation in August.
The money markets show that the odds of the BoE making no change to borrowing costs at noon on Thursday have risen to 73% this morning.
That’s up from 65% before we learned that inflation stuck above the Bank’s target in August, at 2.2%.
Monica George Michail, associate economist at research institute NIESR, says the Bank will have noted that underlyinng inflation “remains elevated”, even though headline CPI inflation was unchanged:
“Annual CPI inflation in August remains unchanged from July at 2.2%. Core and Services inflation rates have slightly gone up, after an encouraging fall in July, recording 3.6% and 5.6%.
Given that inflation is set to gently rise towards the end of the year, and that underlying inflation remains elevated, this reduces chances of a rate cut tomorrow, and new developments will be closely monitored by the MPC”
Factory gate inflation slows
Inflation at the UK factory gate slowed last month, which may feed through to consumers in coming months.
The output prices charged by UK producers rose by 0.2% in the year to August, the Office for National Statistics reports, down from 0.8% in July.
Producers saw their own input prices fall, by 1.1% year-on-year, thanks to a drop in the oil price.
Factory gate prices rose by 0.2% in the year to August, down from an increase of 0.8% in the year to July.
Meanwhile, the cost of raw materials fell 1.2% in the year to August, down from a revised increase of 0.2% in the year to July.
Read the release ➡️ https://t.co/RVyWiQG2T9 pic.twitter.com/wjC7d5c8PL
— Office for National Statistics (ONS) (@ONS) September 18, 2024
Services inflation rises, but goods prices keep falling
Services inflation accelerated to 5.6% in August, from 5.2% in July, the inflation report shows.
Conversely, goods prices continued to fall, and at a faster rate. The CPI goods annual rate fell from -0.6% to -0.9%.
Core inflation rises
Worryingly, underlying inflation across the UK has risen.
The Core CPI, which excludes energy, food, alcohol and tobacco, rose by 3.6% in the 12 months to August 2024, up from 3.3% in July.
Economists had expected a smaller rise in core inflation, to 3.5%.