Inflation was 2.2 per cent in the 12 months to August, unchanged from the month before, today’s update from the Office for National Statistics reveals. This is ever so slightly above the Bank of England’s target of 2 per cent, but it’s in the ballpark of where it’s supposed to be. And while the Bank expects inflation to rise slightly by the end of the year – to just under 3 per cent – it is due to fall again in 2025 and remain around target for the years to come. These figures are good news for Labour, but they raise question marks over how long the government can continue the doom and gloom about Britain’s economy.
Long gone are the days of double-digit price hikes and a spiralling inflation crisis. Still, the underlying data in today’s update could give a hawkish Bank reason to hold off on a second interest rate cut until later into the autumn. While the headline inflation rate remains unchanged, core inflation (which excludes more volatile prices like food and energy) rose from 3.6 per cent in the 12 months to August, from from 3.3 per cent in July. Meanwhile the annual services rate rose from 5.2 per cent to 5.6 per cent, largely driven by transport costs, ‘particularly air fares’.
The economic data, including the inflation rate, simply don’t paint a picture anything as bleak as what’s being described
Combine this increase in the services rate with the mixed data from the latest labour market update, and it’s no surprise that markets are expecting Threadneedle Street to hold rates on Thursday, and wait until their November meeting for a another 0.25 percentage point rate cut. Capital Economics reports this morning that ‘a pause on interest rate cuts was already expected tomorrow and today’s release cements that view,’ with the assumption that rate cuts will now take place at ‘alternative BoE meetings until June’.
Such a process would certainly reduce the base rate, though there is to be no return to ultra-low rates. Still, all this remains pretty good news for Keir Starmer’s government, which has been able to hand out inflation-busting pay rises in it’s first big spending announcement, without having to factor in the fight against inflation experienced by the previous government.
But it does raise questions about the government’s current narrative around the economy: that it’s on the brink, in far worse shape than realised ahead of the election and that winter fuel payments would have led to a run on the pound.
The economic data, including the inflation rate, simply don’t paint a picture anything as bleak as what’s being described. Having been told for years that the ‘tough decisions’ had to be taken to get the economy back on its feet, there’s no doubt people are slightly exhausted by the rhetoric. More importantly, there’s no guarantee people will feel like the rhetoric matches reality.
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