The United Kingdom inflation numbers for July came in at 3.8%, the highest in the last 18 months. The figure pushed back expectations of any rate relief from the Bank of England in the coming months.
July’s gain is now ahead of June’s 3.6%, and the Office for National Statistics (ONS) projection of 3.7%. According to the ONS, the unexpected rise in inflation could be due to the surge in transport, particularly in air travel and motor fuel costs. However, after the report, the pound reversed losses and held near $1.3492.
Businesses push costs to United Kingdom residents
With the rise in the inflation figures for July, the United Kingdom has now registered two consecutive months of consumer price rises. According to reports, services inflation, a key metric for measuring economic pressure, also hit 5% in the month, just above the 4.9% forecast made by the Bank of England and June’s 4.7%. In addition, the prices of food and non-alcoholic drinks have jumped 4.9% from a year earlier.
The jump extends their run of consecutive increases to four months. Some analysts have linked the rise in consumer prices to businesses passing on the billions in added costs from Chancellor Rachel Reeves’ April tax and minimum-wage increases to residents. Nonetheless, the rise in inflation has further dampened expectations of more rate cuts. After the BOE’s cut to 4% on August 7, some traders have pulled back on wagers for further easing, with policymakers warning of second-round pressures on wages and prices.
Now, in light of the latest inflation data, traders see only a one-in-three chance of a November cut and just a 50% likelihood of easing by December. The figures have also dented support for Chancellor Rachel Reeves and Prime Minister Keir Starmer, who took office pledging to lift living standards for “working people.” Instead, their planned recovery in household incomes is losing momentum, squeezed by rising prices and a softer labor market—pressures which opponents have tied to their tax-raising October budget.
Policymakers say inflation may reach 4% in September
The need to cut borrowing costs has become debatable, with some MPC members arguing that surging food and energy prices could entrench inflation expectations. It took two ballots for the committee to agree to cut rates to 4%. However, policymakers cautioned that cheaper borrowing could benefit homeowners with mortgages, but it may also mean weaker returns for depositors.
BOE Governor Andrew Bailey, nonetheless, characterized the rate cut as a “finely balanced” decision. He noted, however, that the overall direction for interest rates is still downward and that further reductions would need to be delivered gradually, though he did not give any timelines. Suren Thiru, economics director at chartered accountancy body the ICAEW, suggested that the July data has taken a September rate cut by the MPC off the table.
He further stated, “Strengthening underlying inflationary pressures also calls into question whether policymakers will be able to relax policy again this year.” Policy makers expect inflation to reach its highest level in September at 4%, twice the BOE’s target rate and higher than the 3.8% anticipated in May. However, per the July figures, it seems inflation is sticking more firmly in the UK than elsewhere. In July, eurozone inflation stood at 2%, France recorded below 1%, and US CPI rose 2.7% year-on-year.
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