UK inflation unchanged at 2.2%

Annual inflation in the UK held steady at 2.2 per cent in August before the Bank of England’s next interest rate decision on Thursday.
Official figures show that annual consumer prices were stable between July and last month, when measured on an annual basis, defying expectations of a slight increase to 2.3 per cent. The Bank, which cut interest rates in August, targets a rate of 2 per cent.
A closely watched measure of core inflation, which strips out volatile elements such as food and energy, accelerated from 3.3 per cent to 3.6 per cent — higher than the 3.5 per cent forecast by economists.
The Office for National Statistics said that air fares were the biggest drivers of price growth last month, rising by 11.9 per cent on the year, having fallen the previous year. Downward inflationary pressures came from a 3.4 per cent decline in fuel inflation and prices in restaurants and hotels rose by 4.4 per cent, the lowest rate in three years.
The figures come in advance of the monetary policy committee’s next meeting on Thursday, where rate-setters are widely expected to keep the base rate unchanged at 5 per cent. The MPC loosened policy for the first time in four years this summer but is expected to gradually cut borrowing costs this year. Markets expect only one more rate reduction in 2024 to take the base rate to 4.75 per cent.
The MPC is still closely monitoring services inflation, which jumped from 5.2 per cent to 5.6 per cent in August, which may worry more hawkish rate-setters. Overall, good prices remained in deflationary territory, declining by 0.9 per cent over the year.
Economists expect rising energy prices from next month to keep inflation creeping higher for most of the year, while previous sources of price pressures, like wages, have started falling.
Darren Jones, the government’s chief secretary to the Treasury, said: “Years of sky-high inflation have taken their toll and prices are still much higher than four years ago. While more manageable inflation is welcome, we know that millions of families across Britain are struggling, which is why we are determined to fix the foundations of our economy so we can rebuild Britain and make every part of the country better off.”
In a note to clients, Ruth Gregory, deputy chief UK economist, at Capital Economics, wrote that the rise in services inflation “most probably rules out a September rate cut”.
“Overall, a pause on interest rate cuts was already expected tomorrow and today’s release cements that view. We continue to assume the next 25 basis point rate interest rate cut will take place in November and that rates will be cut at alternative BoE meetings until June,” she said.
Yael Selfin, chief economist at KPMG, also argued that “strong services sector inflation likely closes the door on interest rate cut tomorrow”.