Inflation has returned to more normal levels. But at the Bank of England, there are concerns that the battle to keep it close to the government’s 2% target has yet to be decisively won.
Official figures from June showed the key measure remained on target for the second straight month, raising hopes that the worst of the burst of inflation following the exit from the Covid lockdowns and the Russian invasion of Ukraine has passed.
After the Bank raised interest rates 14 times, to 5.25% – the highest level since the 2008 financial crisis – to fight inflation, there have been hopes for some time that a return to more normal levels could guarantee a reduction in official costs. of borrowing.
Coming down from a peak of 11.1% in October 2022, signs of stability in consumer price growth will come as welcome relief to households and businesses. However, the cost of living still remains significantly higher than three years ago and the Bank is concerned that inflation will rise above its target within months.
The biggest worry for Threadneedle Street will be signs of stubborn inflationary pressure in the services sector – one of the key areas the Bank has said it is monitoring closely when considering whether to sanction a rate cut.
The latest figures showed services inflation held steady at 5.7%, a blow to those backing a cut. The ONS said three main sub-sectors were contributing to the rising levels of price increases: restaurants and cafes, rentals and hotels.
Some economists said this could be due to Taylor Swift’s tour landing in Britain last month, sparking a boom in demand for hotels and other consumer-facing services as Swifties flocked to countries concerts across the UK.
For stubborn inflation, read: “It’s me, hello, I’m the problem, is it me?” The ONS is not so sure. Government statisticians recorded many of the prices in their data set before the concerts took place, while their samples were taken from hotels all over the country, not just in places where Taylormania had taken hold.
There may have been some evidence of Swift’s impact on hotel inflation, with average price increases rising from 7% in May to 9.8% in June. But cultural services inflation, which would capture ticket prices, fell from 7.4% to 7.3%.
However, financial markets are getting a signal that domestic inflationary pressures may prove more durable than expected. The odds of the Bank cutting rates at its next policy meeting on August 1 have fallen from around 50% to close to 35%, while the pound strengthened to a one-year high, breaking $1.30 in global markets currency.
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Several members of the Bank’s monetary policy committee, including its chief economist, Huw Pill, warned last week that service sector inflation and a tight jobs market could force Threadneedle Street to take a cautious approach. Official labor market figures will be released on Thursday, giving the central bank plenty of time to come up with a picture before its next meeting.
However, some economists believe that when it comes to signs of continued inflation in the services sector, the Bank should shake it up.
Commodity prices, and in particular the prices of durable goods, remain stable in deflation. Producer price inflation – reflecting factory gate prices, which can act as a guide to future consumer prices – was also weaker than expected.
With concerns that high interest rates are putting an unnecessary burden on the economy and households, there will be increasing demand for lower borrowing costs.