The UK’s inflation rate is comfortably back to target: inflation held at 2 per cent in the 12 months leading up to June, the Office for National Statistics confirmed this morning. This rate is unchanged from last month.
Yet this morning’s news is stirring up doubts that the Bank of England will go for its first rate cut in August. This is because, while the headline rate is back to the Bank’s target, the services annual rate remains sticky, unchanged from 5.7 per cent. Big reductions in clothing and footwear – which slowed to 1.6 per cent in the year to June, down from 3 per cent in the year to May – were offset by fairly large increases in other sectors. Restaurants and hotels rose to 6.3 per cent in the year to June, up from 5.8 per cent to May.
It’s what some are calling the Taylor Swift effect, as her three sold-out Wembley shows in June put added pressure on the hospitality industry (particularly hotels, which accounted for the largest month-on-month increase). But service sector inflation was proving stubborn long before the singer came to town.
Capital Economics notes this morning that cultural services inflation, ‘which would capture any influence from the ticket prices,’ actually slowed 7.4 per cent to 7.3 per cent. One-off events like concerts, the Euros, or bank holidays tend to settle in the data quickly: displaced activity is accounted for a month later, spikes in prices or retail tend to settle down. Both services and core inflation have been persistent, suggesting a one-off event can’t account for why price increases are skewed to the upside.
Markets suspect that Threadneedle Street is gearing up to push back an Autumn rate cut, as services inflation is notably above the 5.1 per cent rate for June that it had forecast last month. The BoE could still just about make good on a summer rate cut if it opted to do so at its September meeting instead. But the repeated delays continue to highlight just how hawkish the Bank has become, after failing to see the inflation crisis coming down the track in 2021.
Still, rate cuts are expected eventually. The Bank has said repeatedly in its recent minutes that it is possible to start cutting rates while also keeping monetary policy tight – largely because the base rate currently sits at 5.25 per cent. Small, slow, and steady cuts would still keep rates relatively high – especially compared to where they have been in previous years.
Rate cuts remain on the cards. But the waiting game continues.
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