Food prices rise at fastest rate since January 2024 with vegetables, milk, cheese and fish going up; Bank of England expected to keep interest rates on hold on Thursday
At 3.8%, the latest UK inflation data certainly isn’t welcome news for the Bank of England ahead of its decision on Thursday, where it’s widely expected to leave rates on hold, said James Smith, developed markets UK economist at ING.
Yet the latest data doesn’t dramatically move the needle one way or another on the prospect of a further rate cut later this year.
Inflation is more or less at a peak, though it’s likely to stay in the 3.5-4% area for the rest of this year.
However, we think there is still scope for services inflation to undershoot the Bank’s forecasts further in the next release for September. And more broadly, we are seeing a significant easing in rental growth, which is set to be a significant source of service sector disinflation over the coming months.
If we’re right about that, it would tip the balance slightly more in favour of a November rate cut, which we still narrowly expect. Certainly, we aren’t in the camp that thinks rate cuts are over. Services inflation should show more visible progress next spring, while wage growth should ease below 4% by year-end. Add in the fact that the late-November autumn Budget is likely to be dominated by tax rises, and we think there’s still a decent case for UK interest rates to fall two or three more times by next summer.
The good news is that August inflation data has corrected some of the upside surprise we saw last month. The bad news is that CPI has maybe a little further to go before hitting its peak. Indeed, food inflation continues to push higher – though survey data suggest that we may be nearing the peak on this front too. And despite better services data this morning, inflation in the largest basket remains sticky. To be sure, there are some encouraging bits of information in today’s report – and we will need to see more of this for the Bank of England to cut Bank Rate again.
This is why we continue to see a slightly longer pause when it comes to the Bank’s next rate move. For us, the MPC [monetary policy committee] may want to wait for a larger accumulation of evidence before dialling down restrictive policy again. Seeing the downtrend in CPI begin could assuage fears on the committee that the hump in inflation is not turning into a plateau.
