Inflation in the U.K. held steady in June after returning to the Bank of England's (BoE) target the previous month, official data showed Wednesday, confounding expectations for another slight slowdown and leaving fewer chances for a potential rate cut next month.
The annual inflation rate came at 2%, the Office for National Statistics (ONS) data showed, while strong underlying price pressures prompted investors to reduce bets that the BoE will cut interest rates in two weeks' time for the first time since 2020.
The Office for National Statistics said the largest upward contribution to the annualized inflation rate came from restaurants and hotels, with some economists attributing the increases to Taylor Swift's tour of the U.K.
The flat reading compared to June a year ago was a tad higher than expected. Most economists had anticipated a modest decline to 1.9%.
Britain's once-towering headline inflation is lower than in the United States and the eurozone after past jumps in food and energy prices fell out of the numbers.
But core inflation is higher and the BoE is unlikely to take much comfort from the latest figures.
The last time inflation was at 2% was in July 2021 before prices started to shoot up, first as a result of supply chain issues during the coronavirus pandemic and then because of Russia’s invasion of Ukraine, which pushed up energy costs.
Financial markets think it's going to be a close call as to whether the Bank of England will reduce its main interest rate from 5.25% on Aug. 1.
Some policymakers are still concerned over the scale of price rises in the crucial services sector and the pace of wage increases, which raise the risks of an inflation rebound if interest rates are cut too soon.
"Today’s inflation report will keep the Bank of England’s August rate decision on a knife edge," said Luke Bartholomew, deputy chief economist at asset management firm abrdn, formerly Aberdeen Asset Management. "More fundamentally, the ongoing stickiness of services inflation will leave the Bank wondering how long inflation will stay at the 2% target."
"If an August rate cut was 'touch and go' before this morning's data then it's even more so now," Cathal Kennedy, senior U.K. economist at RBC Capital Markets, said.
Economists polled by Reuters had mostly expected headline consumer price inflation would ease to 1.9% in the 12 months to June, extending its drop from a peak of 11.1% in October 2022.
Inflation for services was 5.7%, the Office for National Statistics said, unchanged from May. The Reuters poll had pointed to a slightly weaker 5.6% increase.
Investors pared back bets on a BoE rate cut on Aug. 1, the date of its next scheduled monetary policy announcement, to about 35%, down from just under 50% before the data.
The pound hit its highest for nearly two years against the euro and around one year against the dollar, rising above $1.30.
The Bank of England, like the U.S. Fed and other central banks, raised interest rates aggressively in late 2021 from near zero to counter the rapid increase in inflation, which hit a peak in late 2022.
Higher interest rates – which cool the economy by making it more expensive to borrow – have helped ease inflation, but they’ve also weighed on the British economy, which has barely grown since the pandemic rebound.
Swift hotel price bump?
Deutsche Bank chief U.K. economist Sanjay Raja said the hotel price increase might reflect the Taylor Swift tour. Although this rise could well reverse in July's data, overall Wednesday's inflation numbers would not be encouraging for the BoE.
"We now think that an August rate cut is finely balanced. A lot will now depend on the strength of the May wage and unemployment data," he said.
Data due on Thursday is expected to show wages are still rising by almost 6% a year – roughly double the rate that would be compatible with keeping inflation at 2%.
An interest rate cut on Aug. 1 would give an early boost to new Prime Minister Keir Starmer and his finance minister, Rachel Reeves, after a landslide election victory two weeks ago.
The new government's legislative agenda – including its plans to boost economic growth – is due to be announced in parliament later on Wednesday.
But last week the BoE's Chief Economist Huw Pill said the timing of the first rate cut remained an open question. On Tuesday, the International Monetary Fund's (IMF) chief economist, Pierre-Olivier Gourinchas, said services inflation in Britain, like in the United States, was likely to prove sticky.
Core inflation – excluding volatile food and energy prices – held at 3.5% in the 12 months to June, the ONS said, matching the median forecast in the Reuters poll.
The BoE had expected headline inflation of 2.0% in June and services inflation of 5.1%, according to forecasts it published two months ago. The BoE also expected headline inflation to rise back above its target later this year and through 2025.
The ONS said upward pressures on headline inflation in June included a smaller fall in the costs of second-hand cars than in June last year, as well as the increase in hotel prices.
Some analysts pointed to a fall in service price inflation in June if volatile items such as hotel prices are excluded.
The ONS used 56 price quotes to measure hotel inflation in June with two of them raising prices by 176% and 145% from May. One of those two was located in northwest England shortly before Swift performed in Liverpool, accountant and data analyst Peter Donaghy said on X.
Clothing prices fell as retailers resorted to discounting to entice shoppers still feeling the impact of a cost-of-living squeeze and wetter-than-usual summer weather.