UK inflation rose to 2.2 per cent in July, marking the first increase this year and increasing the chances the Bank of England keep interest rates at the same level when they meet next month.
The Consumer Prices Index (CPI) inflation rose from 2 per cent in June, but undershot economists’ expectations who had forecast it rising to 2.3 per cent.
However, despite the smaller than anticipated inflation increase, it is still above the Bank’s target of 2 per cent and casts doubt on back-to-back interest rate cuts at September’s meeting.
CPI services price inflation, which is closely monitored by the Bank, fell by more than expected from 5.7 per cent in the previous month to 5.2 per cent in July.
“Inflation ticked up a little in July as although domestic energy costs fell, they fell by less than a year ago. This was partially offset by hotel costs, which fell in July after strong growth in June, said Grant Fitzner, the ONS’s chief economist.
The latest figures mean that prices are rising faster across the country than in previous months, but still at a slower rate than in 2022 and 2023 when households and businesses were being squeezed during the peak of the cost crisis.
The lower than anticipated inflation increase comes after the Bank’s monetary policy committee voted to cut interest rates to 5 per cent earlier in August, a quarter-point reduction.
Economists predict that the slight uptick in inflation could mean that Bank policymakers will decide to keep interest rates on hold, but anticipate further cuts before the end of the year.
Ruth Gregory, deputy chief UK Economist at consultancy Capital Economics, said: “The smaller-than-expected rise in CPI inflation from 2.0% in June to 2.2% in July (consensus 2.3%, CE 2.1%, BoE 2.4%) and the sharp fall in services inflation from 5.7% to a two-year low of 5.2% will reassure the Bank of England that the disinflation process is on track and opens the door to more interest rate cuts later this year.”
Sarah Coles, head of personal finance at Hargreaves Lansdown, said the inflation rise is “not massively welcome, especially for people hoping to be able to enjoy the new space in their budgets created by wage rises, but it’s not a huge upset either”.
“It’s likely to be business as usual at the Bank of England in September, with rates on hold, so it’s unlikely to alter the picture significantly for savers and borrowers,” she said.
Luke Bartholomew, deputy chief economist at fund manager Abrdn, said the fall in the rate of services inflation “should help reassure some policymakers that inflation pressures are proving slightly less persistent than feared”.
“After yesterday’s solid labour market report, the Bank will not be in any hurry to cut rates again immediately, but the ongoing slowing in inflation pressure means there is certainly scope for at least one more rate cut this year.”
The Bank has said it expects inflation to rise to about 2.75 per cent in the second half of this year, amid persistent price rises in the service sector.
Inflation will then fall back over the subsequent years to 1.7 per cent in 2026, it predicted earlier this month, then down to 1.5 per cent in 2027.
Darren Jones, the chief secretary to the Treasury, said: “The new government is under no illusion as to the scale of the challenge we have inherited, with many families still struggling with the cost of living. That is why we are taking the tough decisions now to fix the foundations of our economy so we can rebuild Britain and make every part of the country better off.”