Inflation in Britain rose for the first time this year, reaching 2.2% in July, slightly above the Bank of England’s 2% target, according to the latest figures from the Office for National Statistics (ONS).
This rebound was mainly driven by a less pronounced decline in gas and electricity prices compared to the previous year, despite the fact that domestic energy costs continued to decline overall.
The rise in inflation was less significant than expected, with City analysts predicting a rise to 2.3% and the Bank of England predicting 2.4%. Services inflation, a key indicator for the Bank, fell sharply from 5.7% to 5.2%, well below the expected 5.6%. Core inflation also fell slightly, from 3.5% to 3.3%.
The pound responded to the news by falling 0.2% against the dollar to settle at $1.283, as investors speculated on further rate cuts in the coming months.
A slower decline in energy prices over the past year has contributed to the rise in headline inflation, following significant increases in oil, gas and electricity costs following Russia’s invasion of Ukraine in February 2022.
Grant Fitzner, chief economist at the ONS, explains: “Inflation rose slightly in July as, although domestic energy costs have fallen, they are less than a year ago. This was partly offset by hotel costs, which fell in July after strong growth in June.” Analysts had suggested that Taylor Swift’s Eras tour may have temporarily driven up accommodation costs in June.
This rise in inflation poses the first major economic challenge for Prime Minister Sir Keir Starmer, who has pledged to boost GDP growth and restore stability after a period of frequent policy changes under the previous Conservative government.
New estimates from the ONS, due on Thursday, indicate that the UK economy grew by 0.6% over the past three months, down slightly from 0.7% in the first quarter.
Darren Jones, Principal Secretary to the Treasury, acknowledged the challenges ahead, saying: “The new government is under no illusions about the scale of the challenge we have inherited, with many families still struggling with the cost of living. That’s why we’re taking tough decisions now to rebuild the foundations of our economy, so we can rebuild Britain and make every part of the country better off.”
Chancellor Rachel Reeves is expected to announce tax rises in her first budget on October 30, after the government overspent by £21.9 billion.
The rise in inflation comes just two weeks after the Bank of England cut interest rates by a quarter of a percentage point to 5%, the first cut since March 2020. Despite persistent concerns about high services inflation and wage growth, which are pushing inflation above target could keep, inflation will continue to rise. The bank is expected to continue to reduce financing costs, with a further reduction of 50 basis points by the end of 2024.
Meanwhile, recent data showed a slight fall in unemployment, from 4.4% to 4.2%, leading to speculation about the Bank of England’s next move at the upcoming Monetary Policy Committee meeting on September 19. Wage growth also slowed to 5.4%, the lowest level in almost two years.
Yael Selfin, chief economist at KPMG UK, commented: “Despite a modest increase, inflation was relatively subdued in July as weaker core and food price inflation largely offset the waning impact of previous energy price declines. This should provide some measure of reassurance to MPC members as the Bank’s own forecasts earlier this month pointed to a sharper increase.”