UK Inflation Holds Steady at 2.2%, Services Sector Sees Sharp Rise
UK inflation remained at 2.2% in August, with services inflation jumping to 5.6%. The Bank of England is expected to maintain interest rates at 5% despite cooling trends in some sectors.
The UK's inflation rate remained unchanged at 2.2% in August 2024, according to the latest data from the Office for National Statistics (ONS). This stability comes despite a significant increase in services inflation, which rose to 5.6%, primarily driven by higher air fares during the summer holiday season.
Grant Fitzner, chief economist at the ONS, expressed optimism about the inflation outlook, stating:
"It's hard to see where a significant uptick in inflation might come from at the moment."
However, the Bank of England faces a complex decision as it prepares for its upcoming interest rate announcement. While the headline inflation rate remains steady, core inflation, which excludes volatile components like energy and food, increased to 3.6% in August from 3.3% in July.
The services sector, closely monitored by the Bank of England, saw a sharp rise in inflation to 5.6%, well above the central bank's 2% target. This increase was largely attributed to a 22% jump in air fares between July and August 2024, marking the second-largest August increase since the ONS began collecting data in 2001.
On a positive note, food inflation continued its downward trend, easing to 1.3% in August. This marks the 17th consecutive month of declining food inflation, providing some relief to consumers. However, certain items, such as olive oil, have seen significant price increases due to drought conditions in the Mediterranean.
The broader economic picture shows mixed signals. Producer input prices fell by 1.2% in the year to August, while factory gate prices rose by a modest 0.2%. These indicators traditionally serve as early signs of consumer price trends.
Despite the recent interest rate cut, the Bank of England is expected to maintain rates at 5% in its upcoming decision. Market expectations for further rate cuts this year have been tempered, with investors now pricing in a 15% chance of an immediate reduction.
Looking ahead, the inflation outlook remains uncertain. The Bank of England anticipates inflation to climb to 2.7% in the final quarter of 2024, partly due to a 10% increase in the energy price cap scheduled for October. Additionally, planned minimum wage increases could exert upward pressure on services inflation.
Darren Jones, chief secretary to the Treasury, acknowledged the ongoing challenges:
"Years of sky-high inflation have taken their toll; and prices are still much higher than four years ago. So, while more manageable inflation is welcome, we know that millions of families across Britain are struggling."
As the UK navigates this complex economic landscape, policymakers must balance the need to control inflation with supporting economic growth and household finances.
