Inflation in the UK remained steady at the Bank of England’s target rate of 2% in the year to June, according to official figures released on Wednesday. This development has left policymakers contemplating a potential cut in borrowing costs next month.
The Office for National Statistics reported that the largest upward pressure on the annualized inflation rate came from restaurants and hotels, with some economists attributing this to the economic boost from Taylor Swift’s UK tour. On the other hand, the biggest downward pressure came from clothing and footwear, which saw widespread sales during the month.
The flat reading, compared to June of the previous year, was slightly higher than anticipated. Most economists had forecasted a modest decline to 1.9%.
The last time inflation was at 2% was in July 2021, before prices began to surge due to supply chain disruptions during the coronavirus pandemic and the subsequent energy cost increases following Russia’s invasion of Ukraine.
Financial markets are closely watching whether the Bank of England will reduce its main interest rate from 5.25% on August 1. Some policymakers remain concerned about the persistent price rises in the services sector and the pace of wage increases, which could lead to an inflation rebound if rates are cut prematurely.
Today’s inflation report will keep the Bank of England’s August rate decision on a knife edge,” said Luke Bartholomew, deputy chief economist at asset management firm abrdn. “More fundamentally, the ongoing stickiness of services inflation will leave the Bank wondering how long inflation will stay at the 2% target.”
The Bank of England, like the US Federal Reserve and other central banks, aggressively raised interest rates in late 2021 from near zero to counter the rapid increase in inflation, which peaked above 11% in late 2022.
Higher interest rates, designed to cool the economy by making borrowing more expensive, have helped ease inflation but have also weighed on the British economy, which has seen minimal growth since the pandemic rebound.
Prime Minister Keir Starmer has emphasized that boosting the UK’s economic growth is the primary mission of his Labour government. Later on Wednesday, his government will outline its plans for the coming year in the King’s Speech to Parliament. Starmer stated that the announced measures would “take the brakes off Britain” and create wealth across the country by spurring economic growth.
