Inflation climbs above Bank of England target to 2.2%

The Office for National Statistics (ONS) said Consumer Prices Index (CPI) inflation rose to 2.2% in July, up from 2% in June.

It represents the first time inflation has climbed since December, driven partly by a sharp drop in energy bills last July falling out of the annual calculations.

The Bank of England said on August 1 that the fall-away of energy bills in the wider inflation figures would show “more clearly the prevailing persistence of domestic inflationary pressures”.

The latest figures mean that prices are rising faster across the country than in previous months, but still at a slower rate than in 2022 and 2023 when households and businesses were being squeezed during the peak of the cost crisis.

The data comes after the Bank of England’s Monetary Policy Committee voted to cut interest rates to 5% earlier in August, a quarter point reduction.

The headline inflation figure of 2.2% is lower than the 2.3% that most City economists were expecting, and undershoots the Bank’s own forecast.

However, the rise in inflation could still set the tone for the MPC’s policy at its next decision in September, where most economists predict they will hold rates and wait until November before cutting borrowing costs again.

Officials expect inflation will continue to nudge up for the rest of 2024 before falling gradually again.

The closely watched annual rate of CPI services price inflation fell to 5.2% in July, down from 5.7% in June, its lowest rate since June 2022.

Experts have warned that persistently high services price inflation could risk pushing the overall inflation data up further, but the drop could provide some encouragement to policymakers.

Darren Jones, Chief Secretary to the Treasury, said the figures showed many families are “still struggling with the cost of living”.

The rate of core CPI, a measure which excludes energy, food, alcohol and tobacco from the figures, was 3.3% in the year to July 2024, down from 3.5% in June.

Ed Monk, associate director for personal investing at Fidelity International, said the drop in core figures suggests the “trajectory for price rises is still downwards”.

It comes after the ONS revealed on Tuesday that wage growth, another key driver of headline inflation, was 5.4% year on year over the three months to June, down from 5.7% in the previous three months.

Martin Sartorius, principal economist at the Confederation of British Industry, added: “Inflation undershooting the Bank of England’s expectations will be seen as a positive sign that price pressures are continuing to normalise for households and businesses.

“Today’s data will give the Bank’s Monetary Policy Committee some measure of confidence that domestic price pressures are less likely to derail a sustainable return to the 2% target.

“A second consecutive cut in interest rates next month is not a certainty, however.

“This is because the MPC will still be mindful of upside risks to the inflation outlook, especially as pay growth remains stubbornly high.”

Luke Bartholomew, deputy chief economist at fund manager Abrdn, said the fall in the rate of services inflation “should help reassure some policymakers that inflation pressures are proving slightly less persistent than feared”.

“After yesterday’s solid labour market report, the Bank will not be in any hurry to cut rates again immediately, but the ongoing slowing in inflation pressure means there is certainly scope for at least one more rate cut this year.”