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UK inflation rose lower than anticipated to 2.2 per cent in July as underlying value pressures fell sharply, opening the door to extra rate of interest cuts by the Financial institution of England this yr.
The annual enhance in shopper costs, reported by the Workplace for Nationwide Statistics on Wednesday, got here in beneath expectations of an increase to 2.3 per cent from economists polled by Reuters.
However the studying nonetheless marked the primary rise this yr and takes inflation above the BoE’s 2 per cent goal. In Could, value progress eased to 2 per cent for the first time in three years and held regular in June.
The central bank had anticipated inflation to rise to 2.4 per cent due to a smaller fall in home power payments, however slower progress in lodge prices helped pull the general determine decrease.
Companies inflation, the BoE’s key measure of home value pressures, declined greater than anticipated from 5.7 per cent in June to five.2 per cent in July, the bottom since June 2022. Analysts had anticipated a fall to five.5 per cent.
Ruth Gregory, economist at consultancy Capital Economics, mentioned the “smaller-than-expected rise” in shopper costs and “the sharp fall in providers inflation” would “reassure the Financial institution of England . . . and opens the door to extra rate of interest cuts later this yr”.
Wednesday’s information comes after the BoE cut interest rates on August 1 for the primary time because the onset of the Covid-19 pandemic.
Annual core inflation, which excludes meals and power, fell to its lowest since September 2021 at 3.3 per cent in July, down from 3.5 per cent in June.
Sterling fell barely towards the US greenback after the info launch, with the pound dropping 0.1 per cent to $1.284.
UK gilts rallied, with the yield on the rate of interest delicate two-year UK gilt dipping by 0.04 proportion factors to three.56 per cent, as buyers scaled up their bets on two extra BoE rate of interest cuts earlier than the tip of the yr.
Rob Wooden, economist at consultancy Pantheon Macroeconomics, mentioned there was “little question” that the autumn in providers value progress supported BoE policymakers’ “argument that inflation pressures are progressively on their manner out, warranting additional rate of interest cuts”.
However he warned that the decline in providers inflation had been pushed partly by erratic airfares and lodge costs and mentioned the Financial Coverage Committee was unlikely to chop charges once more as quickly as its September assembly.
Annual value progress of eating places and inns dropped to 4.9 per cent in July from 6.2 per cent in June, in response to the ONS, and was the biggest drag on the headline price.
The BoE expects UK inflation to extend barely within the second half of this yr however decline to 2.2 per cent by the tip of 2025, to 1.7 per cent by 2026, after which to 1.5 per cent in 2027.
Official information printed on Tuesday showed annual wage growth excluding bonuses, a measure of underlying value pressures, slowed to its lowest in nearly two years at 5.4 per cent.
After this month’s quarter-point discount within the benchmark rate of interest to five per cent, BoE governor Andrew Bailey mentioned “we want to ensure inflation stays low, and watch out to not reduce rates of interest too rapidly or by an excessive amount of”.
Catherine Mann, an exterior member of the MPC, this week said the UK shouldn’t be “seduced” into pondering the battle towards inflation was over after a short-term drop within the headline price.
The uptick in inflation in July had been anticipated within the Treasury and was cited by Conservative officers as a minor consider former prime minister Rishi Sunak’s choice to carry an earlier election.
For the Labour authorities, the small rise in inflation is a reminder of the challenges dealing with chancellor Rachel Reeves, who needs to spice up progress charges however is aware of the BoE will stay cautious about slicing rates of interest additional within the brief time period.
Responding to the inflation information, Darren Jones, chief secretary to the Treasury, mentioned the federal government was “below no phantasm as to the size of the problem we now have inherited”.
Shadow chancellor Jeremy Hunt mentioned Reeves “should not use this information as an excuse to interrupt her guarantees and hike up taxes”.
Within the Eurozone, inflation rose to 2.6 per cent in July from 2.5 per cent in June. In a while Wednesday, separate information is anticipated to indicate US annual inflation was unchanged at 3 per cent in July.