July's inflation figures reveal a slight rise to 2.2%, edging above the Bank of England's target, but economists remain cautiously optimistic about future rate cuts.
The UK's consumer price index (CPI) rose to 2.2% in July, according to data released by the Office for National Statistics (ONS) on Wednesday. This figure, while slightly below market expectations of 2.3%, marks a return to a level exceeding the Bank of England's 2% target.
Inflation had held steady at 2% in both May and June, aligning with the central bank's target rate. The ONS attributed the July increase primarily to rising costs in housing and household services, citing slower decreases in gas and electricity prices compared to the previous year.
Meanwhile, core-CPI, which excludes volatile food, energy, alcohol and tobacco prices, dipped to 3.3% in July, down from the 3.5% recorded the previous month. Services inflation, closely monitored by the Bank of England, also eased to 5.2% in July, down from 5.7% in June.
These inflation figures come in the wake of Tuesday's release of labour market data, which showed that average pay excluding bonuses increased by 5.4% year-on-year between April and June, the lowest rate in two years. The unemployment rate, however, fell to 4.2% over the same period, down from 4.4% across March to May.
The recent inflation data follows the Bank of England's decision earlier this month to cut interest rates for the first time in over four years. The key bank rate was lowered to 5%, marking a decrease from its 16-year high of 5.25% held since August 2023.
In its August Monetary Policy Report, the BOE projected an increase in CPI in the latter half of 2024. However, uncertainty remains about the timing and likelihood of further rate cuts this year. The Monetary Policy Committee is scheduled to convene three more times in 2024.
Following Wednesday's inflation data release, market analysts indicate a roughly 55% chance of the BOE maintaining interest rates in September. The odds of a cut next month have slightly risen, while expectations for a rate trim in November have increased to over 90%.
Despite the slight uptick in inflation, the recent data suggests a continuing trend of easing price pressures in the UK. This, coupled with the Bank of England's recent rate cut and its projected inflation trajectory, fuels ongoing optimism among economists regarding the potential for further interest rate reductions in the near future.