UK Inflation Rises to Highest Since Early 2024 at 3.8%

  • British inflation hit its highest in 18 months in July when it increased to 3.8% from 3.6%, official data showed on Wednesday, once again leaving the country with the fastest rate of price increases among the world's largest rich economies.
  • Inflation in Britain's services sector - which is watched closely by the Bank of England (BoE) - accelerated to 5.0% from 4.7% a month earlier. The BoE expected headline inflation to rise to 3.8% in July, but had forecast a smaller 4.9% rise in services prices. Economists polled by Reuters had expected increases of 3.7% and 4.8% respectively.
  • The BoE cut interest rates this month but only after a narrow 5-4 vote by policymakers, and it suggested it would slow the already gradual pace of lowering borrowing costs due to inflation's persistence. Sterling rose slightly after the data was published, with investors expecting a longer wait before the next BoE rate cut.
  • A quarter-point cut is not fully priced until March 2026. Earlier this month, the next rate cut was viewed as highly likely before the end of 2025. "The economy is experiencing a bout of high inflation and weak growth that will likely remain until next spring," said Deloitte Chief Economist Ian Stewart. He said it was unclear whether the BoE would cut rates again in 2025. The BoE thinks British inflation will hit 4% in September, double its target, and stay above 2% until mid-2027.
  • In contrast, inflation in the United States held at 2.7% in July, and in the euro zone, it is expected to remain around the European Central Bank's 2% target over the coming years.
  • Some of the differences reflect how energy and other utility prices are regulated in Britain. Big increases in utility bills in April have boosted year-on-year inflation comparisons. Britain's relatively tight labour market, which economists say has become more rigid since Brexit, is also putting upward pressure on prices. Wage growth in Britain has slowed, but at about 5% it is too high for the BoE to feel comfortable about inflation returning rapidly to 2%. Furthermore, employers say that a tax increase imposed on them in April by finance minister Rachel Reeves and a big jump in the minimum wage are forcing them to put up prices.

(Source: Reuters)