The United Kingdom’s inflation rate has seen its first increase this year, with official data revealing a 2.2% rise in overall prices for the year ending in July.
According to BBC, ths slight uptick surpasses the Bank of England’s 2% target, where the rate had remained steady since May.
The rise, though anticipated, is attributed to smaller-than-expected drops in gas and electricity prices compared to the previous year.
However, the increase is less significant than many economists had forecast.
While prices are now escalating faster across the UK than in recent months, the pace remains slower compared to 2022 and 2023 when households were particularly burdened by soaring energy and food costs.
The Bank of England forecasts inflation—which gauges the rate at which prices climb—could rise to 2.75% in the coming months before eventually dropping below 2% next year.
Another set of inflation statistics, alongside employment and wage data, is expected before the Bank’s next rate-setting meeting on 19 September.
The Bank had previously raised interest rates to combat the surge in inflation but recently reduced them from 5.25% to 5%—marking the first cut since the pandemic began.
While higher rates can benefit savers, they may also increase mortgage and loan costs for consumers.
“A September rate cut should no longer be off the table,” noted Sanjay Raja, chief UK economist at Deutsche Bank Research. He suggested that multiple rate cuts could be conceivable this year.
On the other hand, Director of Economic research at Deloitte, Debapratim De, argued that the latest figures are “unlikely to materially alter the Bank’s thinking on interest rates.”
The Bank also considers inflation in the services sector when determining rates. Although prices in this sector slowed to 5.2% in July, this deceleration was partly due to fluctuations in airfares and hotel stays.
De further commented, “We expect rates to be kept on hold in September, but two further cuts remain likely this year.”
Interest rate cuts could provide relief for businesses, many of which have struggled with elevated rates and rising inflation in recent years.
Livia Marrocco, who owns Marrocco’s restaurant and ice cream shop in Hove, mentioned to the BBC, “Products have gone up. Ingredients have gone up. We have put prices up slightly.”
However, she noted a recent improvement in business, thanks to favourable weather and the school holidays attracting more customers.
Inflation had previously soared to 11.1% following the Ukraine conflict and pandemic-related supply chain disruptions, severely impacting the cost of living for millions.
However, it had been gradually decreasing until June, aided by the Bank of England’s interest rate hikes intended to curb consumer demand.
The chief economist at the Office for National Statistics, Grant Fitzner, remarked, “Inflation ticked up a little in July as although domestic energy costs fell, they fell by less than a year ago.”
He added that this was “partially offset by hotel costs, which fell in July after strong growth in June.”
Fitzner also highlighted on the BBC’s Today programme that, “under the bonnet” price pressures remained manageable, with services inflation down and food prices stable in July. ”
This still suggests that inflation pressures at least in the short run are fairly moderate,” he said.
According to the Institute for Fiscal Studies, food and drink prices surged by 28.4% between September 2021 and September 2023.
Their analysis indicated that lower-income households experienced larger increases in food bills compared to wealthier households, as price hikes were most pronounced in cheaper brands. However, by July, food price inflation had stabilized at 1.5%, according to the ONS.
The Chief Secretary to the Treasury, Darren Jones, acknowledged that the Labour government is “under no illusion” regarding the ongoing challenges faced by households.
However, Shadow Chancellor Jeremy Hunt emphasized that the latest figures indicate there is “more to be done to keep inflation down.”
The prospect of further interest rate reductions could potentially stimulate activity in the housing market.
A separate ONS figures released on Wednesday, house prices have been rising, although the data predates August’s interest rate cut.
UK property prices increased by 2.7% in the year to the end of June, with England seeing a 2.4% rise, pushing the average house price over £300,000.
The £7,000 increase in a year brought the average home cost in England to £305,000, compared with £216,000 in Wales, £192,000 in Scotland, and £185,000 in Northern Ireland.
