UK inflation rises less than expected in July as pressure on services eases. By Reuters

By David Milliken

LONDON (Reuters) – Britain’s consumer price inflation rose for the first time this year in July, official figures showed on Wednesday, but the increase was smaller than expected as prices of services – closely watched by the Bank of England – increased much less suddenly.

The annual rate of consumer price inflation rose to 2.2 percent after two months at the Bank of England’s 2 percent target, the Office for National Statistics said, slightly lower than the 2.3 percent median forecast in a Reuters poll of economists.

Sterling fell sharply against the US dollar after the data was released on Wednesday, with financial markets betting on a 47% chance of a quarter-point BoE rate cut in September, up from 36% before the release the data.

When the BoE cut interest rates from a 16-year high of 5.25% earlier this month, it said the 2% inflation readings in May and June probably marked a low point for inflation.

The central bank expected CPI to rise to 2.4% in July and to reach around 2.75% by the end of the year as the effect of sharp falls in energy prices in 2023 faded, before returning to 2% in first half of 2026.

“Today’s data will give the Bank’s Monetary Policy Committee some confidence that domestic price pressures are less likely to derail a sustainable return to the 2% target,” said Martin Sartorius, chief economist at the Confederation of British Industry.

British inflation hit a 41-year high of 11.1% in October 2022, driven by a surge in energy and food prices following Russia’s full-scale invasion of Ukraine, as well as labor shortages due to COVID -19 and supply chain disruption.

Consumer price inflation is still lower than in the euro area, where the European Central Bank cut interest rates in June, and in the United States, where the Federal Reserve is expected to start cutting rates next month.

The BoE remains relatively focused on longer-term inflationary pressures, including service prices and wages, as well as the labor market more broadly.

Data on Wednesday showed annual services price inflation fell to 5.2% in July from 5.7% in June, lower than a Reuters poll forecast of 5.5% and the lowest since June 2022. BoE staff had predicted a decline to 5.6%.

The decline in services price inflation reflected a reversal of June’s sharp rise in hotel costs, as well as downward pressure on airfares, road recovery services, package holidays and cultural services, including live music.

Many economists attributed part of June’s rise to UK concert tours, including one by US singer Taylor Swift, although the ONS said it was not possible to establish a definite link.

Official data on Tuesday showed that annual wage growth, excluding bonuses, slowed to the lowest level in almost two years at 5.4%, in line with economists’ forecasts, but still almost double the rate the BoE considers it consistent with maintaining the CPI at 2%.