The Office for National Statistics (ONS) has reported that the UK’s inflation rate remained steady at 2% in June, matching economists’ expectations and the Bank of England’s forecasts.
This marks the second consecutive month at the Bank’s target rate, but underlying inflationary pressures persist, complicating the Bank’s decision on whether to cut interest rates next month.
Hotel prices surged by 8.8% in June, likely influenced by Taylor Swift’s Eras tour in the UK. While overall inflation in the cultural sector, which includes ticket prices for events and live music, remained unchanged at 7.2%, the full impact of Swift’s tour may not have been fully captured as data was collected before her concerts in Cardiff and London.
Grant Fitzner, Chief Economist at the ONS, noted that hotel prices rose sharply, secondhand car costs fell, albeit less than last year, and clothing prices decreased due to widespread sales. The cost of raw materials and factory goods also declined, although factory gate prices remain higher than a year ago.
Prior to the release of these figures, financial markets had anticipated potential monetary easing in August, reflected by the drop in two-year gilt yields below 4% and a weaker pound. However, the unchanged inflation rate led markets to reduce the likelihood of an August rate cut from 50% to 25%, according to Bloomberg. Consequently, London stocks fell and the pound appreciated against the dollar and the euro.
The FTSE 100 dropped 31 points to 8133.73, and the FTSE 250 decreased by 103 points to 21,110.61. Sterling rose by 0.3% against the dollar to $1.3014 and by 0.2% against the euro to €1.19.
A key measure of inflation in the services sector remained at 5.7%, above the Bank’s forecast of 5.1%. Core inflation, which excludes food and energy prices, was stable at 3.5%. Persistent inflation in the services sector, driven by wage growth, poses a challenge for the Bank’s monetary policy committee, which is set to meet on August 1. Rate-setters are seeking more significant disinflation in the services sector and moderation in earnings growth, currently around 6%, before considering monetary loosening.
The ONS identified clothing and footwear prices as the largest drag on inflation due to heavy discounting, while restaurants and hotels were the primary contributors to price increases last month. Darren Jones, Chief Secretary to the Treasury, acknowledged the ongoing burden of high prices on British families despite inflation reaching the target rate.
Last month, the Monetary Policy Committee (MPC) voted 7-2 to maintain the base rate at 5.25% for the tenth consecutive month. Huw Pill, the Bank’s Chief Economist, has expressed concerns over the high levels of services inflation.
Yael Selfin, Chief Economist at KPMG UK, commented that core inflation is likely to remain elevated over the next year, reducing the probability of an interest rate cut in August. Meanwhile, neighbouring central banks in the eurozone, Switzerland, and Sweden have begun cutting interest rates, with market forecasts suggesting the US Federal Reserve might follow suit in September for the first time since the global energy crisis.
