The annual inflation rate in the U.K. rose in July for the first time this year and is now back above the Bank of England's (BoE) target, official data showed on Wednesday.
The Consumer Prices Index (CPI) climbed 2.2% in the 12 months to July compared with a 2.0% annual gain in June, the Office for National Statistics (ONS) said in a statement.
The rise was "mainly driven by prices of gas and electricity falling by less than a year ago," the ONS added.
However, the increase was smaller than expected as services prices – closely watched by the Bank of England – rose much less sharply. The median estimate for inflation in the Reuters poll was 2.3%.
According to some analysts, a faster inflation rate could keep the monetary authority from cutting interest rates quickly, although the rise in the CPI index will likely set the tone for the monetary meeting next month.
The latest figures mean that prices are rising at a quicker pace across the country than in previous months, but still at a slower rate than in 2022 and 2023 when households and businesses were being squeezed during the peak of the cost crisis.
The data comes after the Bank of England's Monetary Policy Committee (MPC) voted to cut interest rates from a 16-year high to 5% earlier in August, a quarter-point reduction.
Sterling fell sharply against the U.S. dollar after the data was published and financial markets priced in a 44% chance of a quarter-point BoE rate cut in September, up from 36% before the data was released.
The central bank expected CPI to rise to 2.4% in July and reach around 2.75% by the end of the year as the effect of sharp falls in energy prices in 2023 faded, before returning to 2% in the first half of 2026.
"Today's data will give the Bank's Monetary Policy Committee some measure of confidence that domestic price pressures are less likely to derail a sustainable return to the 2% target," Martin Sartorius, principal economist at the Confederation of British Industry, said.
British inflation peaked at a 41-year high of 11.1% in October 2022 driven by a surge in energy and food prices after Russia's full-scale invasion of Ukraine as well as COVID-19 labor shortages and supply chain disruption.
Consumer price inflation is still lower than in the eurozone, where the European Central Bank (ECB) cut interest rates in June, and in the United States, where the Federal Reserve (Fed) is widely expected to begin cutting rates next month.
Nonetheless, many households are still feeling squeezed by the sharp rise in prices over the past two years.
Responding to the data, Britain's Deputy Finance Minister Darren Jones stuck to the newly elected Labour government's theme that the figures showed it had inherited a difficult economic legacy and would need to take tough decisions to improve things.
The BoE remains relatively focused on longer-term inflation pressures, including services prices and wages as well as general labor market slack.
Wednesday's data showed that annual services price inflation fell to 5.2% in July from June's 5.7%, lower than the Reuters poll forecast of 5.5% and the lowest since June 2022. BoE staff had predicted a drop to 5.6%.
The fall in services price inflation reflected a reversal in June's sharp increase in the cost of hotels, as well as downward pressure from air fares, roadside recovery services, package holidays and cultural services including live music.
Many economists attributed some of June's increase to concert tours in Britain, including one by U.S. singer Taylor Swift, although the ONS said it was not possible to draw a definite link.
Official data earlier on Tuesday showed that annual wage growth excluding bonuses slowed to its lowest in nearly two years at 5.4%, in line with economists' forecasts but still, nearly double the rate the BoE sees as consistent with CPI staying at 2%.
However, those figures also showed a surprise drop in unemployment – albeit based on a survey that is being overhauled – and economists said the BoE was likely to remain cautious about cutting rates, even after today's inflation data.
"Absent any material shock to growth, this cutting cycle is likely to be gradual with a quarterly cadence most likely. Investors banking on imminent rate cuts will therefore be disappointed," said Aaron Hussein, global market strategist at J.P. Morgan Asset Management.
Wednesday's data "may not alleviate the Bank's concerns about persistent price pressures entirely," noted Ruth Gregory, deputy chief U.K. economist at research group Capital Economics.
"And it probably isn't enough to prompt a back-to-back interest rate cut in September."
Gregory added, however, that she expects the BoE to cut again this year, bringing its main interest rate down to 4.5% from 5.0%.
Financial markets priced in a further 0.49 percentage points of cuts by the BoE over the remainder of this year, up from 0.46 percentage points before the data.
