Inflation Increases for the First Time this Year, Indicating a Return to Normal Fluctuation
The UK’s measure of price increases, the Consumer Price Index (CPI), has seen its first increase this year, rising to 2.2% in the year to July. This is not a cause for panic, but rather a sign that after almost three years of unpredictable volatility, CPI is returning to a period of more stable fluctuation.
The primary reason for this increase is statistical in nature. The base effect of energy prices falling less this year than they did in July 2023 has played a significant role. Last year, the Ofgem retail price cap decreased by over £1,100, while this year’s reduction was only £110. This means that although energy prices have decreased, the annual inflation rate has actually risen.
The Bank of England had predicted this upward movement from its target rate of 2% and has used it to justify its cautious approach towards interest rates. This is despite the recent rate cut, the first since the hiking cycle began.
Beneath the headline rate of CPI, there were numbers that provide some reassurance to the bank. Core inflation, which excludes volatile food and energy prices and reflects the underlying “secondary” effects of inflation, has only slightly decreased from 3.5% to 3.2%. Meanwhile, goods inflation remains negative at -0.6%, but this is an improvement from the previous month’s -1.4%. The increase can be attributed in part to food inflation, which rose to 1.8% after 15 consecutive monthly declines. Inflation in services, which make up the majority of the British economy, has also decreased to 5.2%.
This increase in inflation comes a day after wage inflation has also eased, further fueling expectations of future rate cuts. However, it is not expected to occur at the next Bank of England meeting next month. Market expectations of a rate cut in September have risen to 45%, indicating that a narrow majority believe rates will remain at 5%. However, the prospects of further cuts before the end of the year have been priced at 90% for November and 97% for December.
