UK inflation rate rises for first time this year to 2.2%

 

According to official data, the inflation rate in the UK has risen for the first time this year.

Overall, prices rose 2.2% in the year to July, slightly above the Bank of England’s 2% target, which has been in place since May.

The increase had been widely expected and is due to the fact that gas and electricity prices have fallen less than in the previous year.

The increase is smaller than many economists had expected.

The latest data shows that prices are rising faster across the UK than in previous months, but still at a slower pace than in 2022 and 2023, when households were hit particularly hard by higher energy and food bills.

The Bank of England expects inflation, which measures the rate of price increases, to rise to 2.75% in the coming months, before falling below 2% next year.

Another set of inflation data, as well as employment and wages, will be released before the next rate-setting meeting on September 19.

The Bank had raised interest rates to counter soaring inflation, but last month cut them from 5.25% to 5%, the first reduction since the start of the pandemic.

Higher rates may be beneficial for savers, but they could increase the cost of mortgages and other loans for consumers.

‘September cut not out of the question’

Experts are predicting further cuts this year, and investors are now betting that the Bank will opt for a cut in September.

Sanjay Raja, chief UK economist at Deutsche Bank Research, said: “A rate cut in September should no longer be ruled out. And it is entirely conceivable that we could get several more rate cuts this year.”

But Ruth Gregory, deputy chief UK economist at research group Capital Economics, said Wednesday’s data “may not entirely alleviate the Bank’s concerns about lingering price pressures.”

When deciding on rates, the Bank also takes into account inflation in the services sector.

While prices in this sector slowed to 5.2% in July, this was partly attributed to airfares and hotel stays, which can be quite volatile.

Gregory added, however, that he expects the Bank to make another cut this year, taking the main interest rate from 5% to 4.5%.

Livia Marrocco, owner of Marrocco’s restaurant and ice cream shop in Hove, told the BBC: “The products have gone up. The ingredients have gone up. We’ve put the prices up a little bit.”

However, he said things have been improving lately, with good weather and school holidays attracting more customers.

Inflation has risen to 11.1% in the wake of the war in Ukraine and supply chain crises caused by the pandemic, raising the cost of living for millions.

But it had been steadily declining until June, when the Bank of England raised interest rates to dampen consumer demand.

Grant Fitzner, chief economist at the Office for National Statistics (ONS), said: “Inflation rose slightly in July as, although domestic energy costs fell, they fell less than a year ago.

“This was partly offset by hotel costs, which fell in July after strong growth in June.”

Mr Fitzner also told the BBC’s Today programme on Wednesday that price increases “under the hood” remained under control, with services inflation falling in July and food prices unchanged.

“This still suggests that inflationary pressures, at least in the short term, are rather moderate,” he said.

According to the think tank Institute for Fiscal Studies, food and beverage prices increased by 28.4% between September 2021 and September 2023.

The latest analysis found that lower-income households saw their food spending increase much more than those with higher incomes, as the biggest price increases were applied to the cheapest brands.

But in July, according to the ONS, food price inflation stabilized at 1.5%.

Darren Jones, chief secretary to the Treasury, said the new Labour government was “under no illusions” about the challenges still facing families.

But Shadow Chancellor Jeremy Hunt said the new figures showed “there is still more to be done to keep inflation low”.

The prospect that further falls in interest rates could reduce the cost of borrowing could lead to a revival of activity in the housing market.

Separate figures released by the ONS on Wednesday showed house prices rising, although the data predates the interest rate cut in August.

According to the ONS, UK house prices rose by 2.7% in the year to the end of June.

In England, a 2.4% increase pushed the average house price above £300,000.

The £7,000 increase over the year took the average cost of a house in England to £305,000, compared to £216,000 in Wales, £192,000 in Scotland and £185,000 in Northern Ireland. [BBC]

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