For the first time this year, inflation in the UK has ticked up slightly to 2.2% in the 12 months preceding July, however, the rest of the hyperactive group continued to be hyperactive in the future period. This is only a slight rise and takes it just over the Bank of England’s 2% inflation target where it had been since May.
This rise was not unexpected to most of the specialists. But it is largely because gas and electricity prices have not come down as much as they did this time last year. But as the figure shows, the increase was not as steep as many economists had predicted it to be. The last released data show that prices are even starting to rise more intensively across the UK, but it remains below the levels observed in 2022 and 2023, when households were most affected by increased energy and food costs.
In its future forecast, the Bank of England pins its inflation estimate, which defines the rate of price increase, at 2.75% in the course of the incoming months while dropping sharply to below 2% within the next year. Further figures on inflation will be published before the Bank’s next meeting on interest rates on September 19; indicators of employment and wages are also produced.
To counter the inflation rise the Bank has in the past acted to raise interest rates. However, last month it made a slight cut, aiming at reducing rates to 5% from 5.25%, in the first cut since the start of the Covid19 pandemic. Even though higher rates work to the advantage of savers, the consequences of such a process are a rise in the interest on mortgages and other forms of credit to consumers.
There’s been much discussion about what might be next. According to Mercer, some pundits expect a string of rate cuts in the current year, and one could be seen as early as September. Sanjay Raja, Chief UK Economist at Deutsche Bank Research, also said that September cut is still on the listing and Discussants pointed out that there may be several more cuts this year. On the other hand, Ruth Gregory, Capital Economics’ Deputy Chief UK Economist, revealed that even as the latest figures might not eliminate the Bank’s concern about core inflation, she is considering another rate cut in the year, that could reduce the main interest rate to 4.5%.
If at all, to the businesses, especially to those paying high rates and experiencing inflation these cuts could be a heavenly surprise to them. Livia Marrocco, owner of Marrocco’s restaurant and ice cream shop in Hove, shared her experience: “Products have gone up. Ingredients have gone up. We have put prices up slightly.” However, she also stated that things have of late started to look up if only because the weather is good and it is holiday season hence more people often visit school.
Inflation had risen before to an alarming level of 11.1% especially following the Ukraine war and other challenges that led to the rise of cost of living. But the rate had been trending down to June; the Bank of England has been increasing the interest rates to tame the demand side.
Grant Fitzner, a Chief Economist at the Office for National Statistics said that July’s inflation was mainly caused by domestic energy prices that did not drop as much as they did in the previous year. But this was partly counteracted by a decline in hotel expenses in July having risen sharply in the previous month. Fitzner also emphasised that, while probing deeper, there appear to be only rather moderate inflation pressures and services inflation is down in July as is food inflation.
According to the Institute for Fiscal Studies, food and drink prices surged by 28.4% between September 2021 and September 2023. Their analysis showed that lower-income households were hit hardest, as the steepest price increases affected cheaper brands. However, by July, food price inflation had eased to just 1.5%, according to the ONS.
Darren Jones, Chief Secretary to the Treasury, admitted that the new Labour government fully understands the current difficulties of households. However, shadow chancellor Jeremy Hunt highlighted that the latest data shows it is time for even more actions that would help to tame inflation.
The possibility of additional reduction of interest rates could also spur more activities in the housing market. Other data from the ONS reveals that there have been increases in house prices and 2.7% increase in the year. This growth took the average price for a house in England above £300000 to £305000, a £7, 000 increase compared to Wales where the new average price stood at £216, 000, Scotland £192, 000 and Northern Ireland £185, 000.