Gone are the days when monthly inflation reports dramatically exceeded expectations, causing waves of panic and a flurry of activity on trading floors. The latest data, released this morning, presented a much calmer picture. The headline inflation rate held steady at 2.2 percent, exactly as anticipated.
Beneath the surface, there were some notable developments, but nothing significant enough to alarm the Monetary Policy Committee (MPC).
Read more: Inflation Holds at 2.2 Percent Ahead of Bank of England’s Interest Rate Decision
Core inflation and services inflation, which provide a clearer picture of underlying price pressures, saw slight increases in August, though these rises were largely in line with forecasts. Services inflation, a growing concern for rate-setters recently, actually came in marginally below the Bank of England’s November predictions. It edged up to 5.6 percent from 5.2 percent the previous month, largely due to ‘base effects’—the impact of last year’s figures on the annual comparison.
Some of the strength in services inflation can be linked to volatile areas, such as air fares, which spiked by 22 percent month-on-month, marking the second highest increase on record. The MPC often adjusts for such volatile components in its measures of underlying services inflation.
Bank of England’s Upcoming Announcement
Matt Swannell, chief economic advisor to the EY Item Club, suggested that the recent rise in services inflation should be viewed as a temporary blip. Food and energy inflation also fell short of expectations, reinforcing the notion that overall inflation is relatively under control.
However, this doesn’t necessarily mean the Bank will lower rates in its upcoming announcement. Services inflation remains too high for the Bank’s comfort, and regular pay growth is still over 5 percent, with unemployment dropping to 4.2 percent, indicating a tight labor market.
The prevailing expectation is for the Bank of England to keep rates unchanged tomorrow. Economists, however, predict continued moderation in inflationary measures over the remainder of the year, which could lead to at least one more rate cut. Sanjay Raja, chief UK economist at Deutsche Bank, noted that the MPC is likely to interpret the figures as a “positive sign” that underlying price pressures are easing.
A rate cut in November seems probable, but the outlook beyond that remains uncertain. It’s important to remember that while inflationary pressures are expected to ease, high interest rates will persist, so significant rate cuts are unlikely in the near term. Nonetheless, it appears increasingly feasible to reduce rates without reigniting inflation.
Read more: The Bank of England Decision That Really Matters This Week
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Gone are the days when monthly inflation reports dramatically exceeded expectations, causing waves of panic and a flurry of activity on trading floors. The latest data, released this morning, presented a much calmer picture. The headline inflation rate held steady at 2.2 percent, exactly as anticipated.
Beneath the surface, there were some notable developments, but nothing significant enough to alarm the Monetary Policy Committee (MPC).
Read more: Inflation Holds at 2.2 Percent Ahead of Bank of England’s Interest Rate Decision
Core inflation and services inflation, which provide a clearer picture of underlying price pressures, saw slight increases in August, though these rises were largely in line with forecasts. Services inflation, a growing concern for rate-setters recently, actually came in marginally below the Bank of England’s November predictions. It edged up to 5.6 percent from 5.2 percent the previous month, largely due to ‘base effects’—the impact of last year’s figures on the annual comparison.
Some of the strength in services inflation can be linked to volatile areas, such as air fares, which spiked by 22 percent month-on-month, marking the second highest increase on record. The MPC often adjusts for such volatile components in its measures of underlying services inflation.
Bank of England’s Upcoming Announcement
Matt Swannell, chief economic advisor to the EY Item Club, suggested that the recent rise in services inflation should be viewed as a temporary blip. Food and energy inflation also fell short of expectations, reinforcing the notion that overall inflation is relatively under control.
However, this doesn’t necessarily mean the Bank will lower rates in its upcoming announcement. Services inflation remains too high for the Bank’s comfort, and regular pay growth is still over 5 percent, with unemployment dropping to 4.2 percent, indicating a tight labor market.
The prevailing expectation is for the Bank of England to keep rates unchanged tomorrow. Economists, however, predict continued moderation in inflationary measures over the remainder of the year, which could lead to at least one more rate cut. Sanjay Raja, chief UK economist at Deutsche Bank, noted that the MPC is likely to interpret the figures as a “positive sign” that underlying price pressures are easing.
A rate cut in November seems probable, but the outlook beyond that remains uncertain. It’s important to remember that while inflationary pressures are expected to ease, high interest rates will persist, so significant rate cuts are unlikely in the near term. Nonetheless, it appears increasingly feasible to reduce rates without reigniting inflation.
Read more: The Bank of England Decision That Really Matters This Week
