UK inflation comes in below expectations in July

UK inflation jumped back above the Bank of England’s two per cent target in July, but came in below City estimates for the period.

According to figures released this morning by the Office for National Statistics (ONS), prices rose 2.2 per cent in July.

Meanwhile, core inflation, or price rises excluding volatile food and energy costs, dropped to 3.3 per cent during last month, down from 3.5 per cent in June.

This was the first jump in the consumer price index since December 2023, as inflation has steadily fallen over the last couple of years.

Economists had expected inflation to rise to 2.3 per cent in July, partly due to fast-rising prices in airline flights, package holidays, and hotels.

The ONS said that the largest upward contributions came from housing and household services, as the prices of gas and electricity remained at elevated levels, falling less than last year.

In a surprise move, the largest downward contribution actually came from restaurants and hotels after strong growth in June.

Crucially, the ONS data revealed that domestic inflationary pressures have continued to ease. Service price inflation fell for the second month in a row to 5.2 per cent, down from 5.7 per cent in June.

“Despite the pick-up in headline inflation, this report represents welcome news for the Bank of England,” said Luke Bartholomew, deputy chief economist at Abrdn.

He explained that since the move back above the two per cent target was always expected from energy cuts falling out of the annualised figure, “measures of underlying inflation pressure look to be softening”.

“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,” he added.

Nicholas Hyett, investment manager at Wealth Club, said: “Economists had expected a bit of an inflationary heatwave over the summer, as the effects of lower food and energy prices started to drop out of the numbers and core inflation continued to run hot.

“In the event, the inflationary heat has picked up a bit, but not quite to the degree that had been feared.

“Crucially core inflation continues to fall steadily and is now at its lowest level since September 2021. It’s this number which is key to the long term outlook for the UK and which will drive Bank of England interest rate decisions. All economies are buffeted by global commodity prices; it’s domestically generated inflation that policymakers focus on,” Hyett added.

Suren Thiru, economics director at ICAEW, said: “The notable slowdown in services inflation suggests that underlying price pressures are becoming less troublesome. The growing squeeze on wages from a subdued jobs market should help keep it on a firm downward trajectory.

“These figures mean a September rate cut is improbable and will likely lead to a definitive, possibly unanimous, vote among rate-setters in favour of keeping interest rates on hold,” Thiru added.

Darren Jones, 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.”

July’s inflation data are among a raft of economic figures released this week that will provide key indicators for Bank of England policymakers.

Yesterday, the ONS reported that UK unemployment had fallen unexpectedly in the three months to June while a slowdown in wage growth to its lowest level in more than two years added to signs that the jobs market was cooling.