Inflation held steady at 2.2% in August, in line with expectations and confirming that, while prices and interest rates rose like a rocket, they will return to earth like a feather.
The latest figures for the Office for National Statistics show goods prices finally falling – minus 0.9% in the year to August – but services inflation remains uncomfortably high at 5.6%.
This matters because services, a broad category that includes everything from coffee shops to corporate lawyers, make up 80% of the economy and are the primary contributor to underlying “core inflation” rising to 3.6%.
All eyes on the Bank of England
Wages are one of the key drivers of this increase and the long-held concern at the Bank of England that, once the price shocks of the energy and food inflation passed, upward pressure on pay would leave inflation “sticky”.
Hence the cautionary tone that accompanied the Bank’s 0.25 percentage point rate cut last month, the first in what is expected to be a series of steps down in the coming months.
How fast that descent should be will be at the heart of discussions today when the Monetary Policy Committee meets to make a decision that will be announced tomorrow lunchtime.
The markets put the prospects of a rate cut at just 26%, with a greater chance of another cut coming at the following meeting in November. Absent further external shocks there is a determination that now rates have started to move they should go in only one direction.
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Whether they cut now or later, the direction of travel is in step with other major economies.
The European Central Bank made a 0.25 percentage points cut last week and later today the US Federal Reserve will follow, the only argument there being whether it is a quarter or half-point reduction.
All these central banks are trying to pull off the same trick; to dampen the chance of inflation catching fire again, avoid unnecessary pain for consumers and businesses, and deliver a soft landing for the economy.