Experts Predict UK Inflation to Exceed 2% Target in August
UK inflation is expected to remain above the Bank of England’s 2% target as experts predict a rise in Consumer Prices Index (CPI) inflation when official figures for August are released on Wednesday. After a resurgence in price pressures across the key services sector, most economists are forecasting that the CPI will stay unchanged at 2.2% last month. This follows a slight increase in July from 2% in June, marking the first rise in inflation this year.
Services Sector Driving Inflation
The upcoming data from the Office for National Statistics (ONS) is set to reveal a significant jump in services inflation, covering prices in sectors such as hotels, package holidays, hospitality, and culture. Economists are predicting a rise in services inflation to 5.6% in August, up from 5.2% in July. This spike in prices is partly attributed to the impact of events such as the last leg of Taylor Swift’s UK tour, which could have boosted hotel prices and in turn, services inflation.
Sandra Horsfield, an economist at Investec, commented on the situation, stating, “Similarly, to the extent the jump and then fall in hotel price inflation in June and July this year was indeed linked to temporary extra demand for accommodation for the first UK leg of Taylor Swift’s Eras tour, the second leg of that tour falling into August could have boosted hotel and thereby services price inflation once more.”
Bank of England’s Response
The Bank of England is expected to hit the pause button on interest rate cuts this month, as the persistent high services inflation has been closely monitored by policymakers. While the Bank itself has forecasted a rise in service inflation this autumn followed by a decrease by year-end, experts believe that the official data will likely show services inflation and overall CPI inflation coming in below the Bank’s predictions.
Robert Wood at Pantheon noted, “We expect services inflation to run weaker than the Monetary Policy Committee (MPC) forecast for the rest of this year, but rate-setters will focus on the trend; the persistent component of inflation is fading only gradually, so rate cuts will be unhurried, too.”
Expectations for Inflation in August
Pantheon economists predict inflation to edge up to 2.3% in August, driven by rising airfares and hotel prices. On the other hand, Investec experts anticipate a slight fall to 2.1% due to lower fuel prices at forecourts, although they expect hotel prices to increase. This variation in forecasts reflects the uncertainty surrounding the trajectory of inflation in the coming months.
Sandra Horsfield from Investec added, “If our lower estimates are correct, this should give the MPC some more comfort that the degree of restrictiveness in monetary policy can be dialled back further.” However, she emphasized that the MPC may not feel the need to adjust rates immediately, given the obstacles to a series of rate cuts in the future.
In conclusion, the upcoming inflation figures for August are eagerly anticipated by economists and policymakers alike, as the UK economy navigates through a period of heightened price pressures in the services sector. The impact of events such as concerts and tours on inflation underscores the complexity of forecasting and managing price stability in a dynamic economic environment.