The Bank of England has been tipped to raise its base interest rate yet again after official figures showed inflation slowing to a 17-month low.
The Office for National Statistics (ONS) said on Wednesday (August 16) Consumer Prices Index inflation was 6.8 percent in July, down from 7.9 percent in June, marking the lowest rate since February 2022.
Chancellor Jeremy Hunt welcomed the news as a sign efforts to tackle inflation are working though the reading still represents a sharp increase in the cost of living. Analysts had predicted inflation of 6.7 percent for July.
The latest inflation figure raises questions over what the Bank of England will do in response as it prepares to announce its next interest rate move. Financial market projections factor in a peak of between 5.75 percent to 6 percent.
Core inflation nudging higher in July and a record increase in wages for the three months to June will come as a disappointment to the Bank of England, which is widely predicted to increase rates to 5.5 percent at its next meeting on September 21.
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Julian Jessop, Economics Fellow at free market think tank the Institute of Economic Affairs, accused Threadneedle Street of looking backwards rather than pausing to gauge the impact of its past rate rises.
He said: “The inflation data shows a welcome fall in the headline rate, but core inflation that excludes food and energy remains stuck at 6.9 per cent.
“The headline rate is also likely to tick up in August, reflecting higher fuel and alcohol prices, some unhelpful base effects, and the continued strength of the labour market.
“There are still plenty of reasons to expect inflation to tumble over the rest of the year, notably the sharp slowdown in money and credit growth. Rising unemployment and falling vacancies suggest wage pressures will soon peak too.
“Unfortunately, the Bank of England continues to look backwards at the headline data over the last month or two, rather than pause to assess the impact of the substantial tightening in policy that is already in place. This makes another unnecessary interest rate increase more likely.”
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Analysts have said previously that the Bank of England wants to spark a recession in order to bring inflation back to the central bank’s mandated two percent target.
But on Tuesday (August 14) figures showed wage increases soaring to a record high – though they were still being outpaced by inflation – piling more pressure on the beleaguered central bank.
Official statisticians also revealed yesterday that the UK’s unemployment rate increased from 3.9 percent to 4.2 percent in the three months to June. The number of people with long-term sickness also increased to a record high.
One analyst said the new data will likely give Bank of England decision makers a “migraine” as it heaps further pressure on them to keep hiking interest rates.
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Martin McTague, National Chair of the Federation of Small Businesses, said: “While a drop in inflation provides some comfort, today’s figures show less of a drop in inflation than hoped for, and will renew fears of a wage-price spiral, and of yet more base rate hikes in future.
“The worry now is rising wages ignite a fresh wave of inflation in September, which will threaten the momentum from June’s GDP growth.”
James Smith, research director at the Resolution Foundation, said inflation has fallen rapidly over the past six months, but the UK still has the highest rate in the G7 and the Bank faces a “daunting task” in further taming price pressures.
He added: “Accelerating pay growth will make even the Prime Minister’s promise to halve inflation hard to meet, let alone the Bank’s mandate of reducing it to two percent.”
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