Economy

UK inflation rises to 2.2%

Inflation in the UK climbed for the first time this year, reaching 2.2% in July, slightly above the Bank of England’s 2% target, according to the latest figures from the Office for National Statistics (ONS).

This uptick was primarily driven by a less pronounced drop in gas and electricity prices compared to the previous year, despite domestic energy costs still falling overall.

The increase in inflation was less significant than anticipated, with City analysts predicting a rise to 2.3% and the Bank of England forecasting 2.4%. Services inflation, a key metric for the Bank, saw a sharp decline to 5.2% from 5.7%, well below the expected 5.6%. Core inflation also eased slightly, dropping from 3.5% to 3.3%.

The pound reacted to the news by slipping 0.2% against the dollar, settling at $1.283, as investors speculated on further interest rate cuts in the coming months.

A slower decline in energy prices over the past year contributed to the rise in headline inflation, following significant increases in oil, gas, and electricity costs after Russia’s invasion of Ukraine in February 2022.

Grant Fitzner, Chief Economist at the ONS, explained, “Inflation ticked up a little in July as although domestic energy costs fell, they fell by less than a year ago. This was partially offset by hotel costs, which fell in July after strong growth in June.” Analysts had suggested that Taylor Swift’s Eras tour may have temporarily inflated accommodation costs in June.

This inflation rise poses the first significant economic challenge for Prime Minister Sir Keir Starmer, who has pledged to stimulate GDP growth and restore stability after a period of frequent policy changes under the previous Conservative government.

New estimates from the ONS, expected on Thursday, indicate that the UK economy grew by 0.6% over the past three months, a slight decrease from 0.7% in the first quarter.

Darren Jones, Chief Secretary to the Treasury, acknowledged the difficulties ahead, stating, “The new government is under no illusion as to the scale of the challenge we have inherited, with many families still struggling with the cost of living. That is why we are taking tough decisions now to fix the foundations of our economy so we can rebuild Britain and make every part of the country better off.”

Chancellor Rachel Reeves is expected to announce tax increases in her first budget on 30 October, following a government overspend of £21.9 billion.

The rise in inflation comes just two weeks after the Bank of England cut interest rates by a quarter point to 5%, the first reduction since March 2020. Despite ongoing concerns over high services inflation and wage growth, which could keep inflation above target, the Bank is expected to continue reducing borrowing costs, with a further 50 basis points cut anticipated by the end of 2024.

Meanwhile, recent data showed a slight decrease in unemployment, down to 4.2% from 4.4%, leading to speculation about the Bank of England’s next move at its upcoming Monetary Policy Committee meeting on 19 September. Wage growth also moderated to 5.4%, marking its lowest level in nearly two years.

KPMG UK’s Chief Economist, Yael Selfin, remarked, “Despite a modest rise, inflation was relatively subdued in July as weaker core and food price inflation largely offset the diminishing impact of earlier falls in energy prices. This should provide a degree of comfort for MPC members, as the Bank’s own forecasts earlier this month pointed to a sharper uptick.”

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