The UK’s July inflation print came in at 3.8%, the highest rate in 18 months, pushing back expectations of any rate relief from the Bank of England in the coming months.
July’s gains now surpass June’s 3.6% and the Office for National Statistics (ONS) projection of 3.7%. The ONS explained that the unexpected uptick in inflation could be due to costlier transport, particularly surges in air travel fares and motor fuel costs.
However, after the report, the pound reversed losses and held near $1.3492.
Businesses push extra cost burdens to consumers, analysts say
With July’s inflation climb, the UK has now registered two straight months of rising consumer prices. Services inflation, a key metric for economic pressures, even hit 5% in the month, just above the Bank of England’s 4.9% forecast and June’s 4.7%.
Additionally, food and non-alcoholic drink prices jumped 4.9% from a year earlier, extending 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 narrower-than-expected cut to 4% on Aug. 7, some traders had 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 expect inflation to reach 4% in September
Cutting borrowing costs proved contentious, 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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Source: https://www.cryptopolitan.com/uk-inflation-hits-18-month-peak-in-july/
