UK Inflation Rises Below Expectations

U.K. inflation rose to 2.2% in July, slightly below economists' expectations of 2.3%, according to data from the Office for National Statistics. This marks the first increase in inflation this year, surpassing the Bank of England's target of 2%. The consumer price index (CPI) had remained at 2% in both May and June. Core-CPI, which excludes volatile items like food and energy, decreased to 3.3% from 3.5% in June, while services inflation also eased to 5.2%, down from 5.7%. The Bank of England recently cut interest rates for the first time in over four years, lowering the key bank rate to 5% from a 16-year high of 5.25%. In its Monetary Policy Report, the Bank indicated expectations of rising inflation in the latter half of 2024. The Monetary Policy Committee is scheduled to meet three more times in 2024 to assess economic conditions. Market reactions to the inflation data suggest a 55% chance that the Bank of England will maintain current rates in September, with a slight increase in the likelihood of a rate cut next month. Analysts, including Sanjay Raja from Deutsche Bank, emphasize that upcoming inflation and labor market data will be critical in determining the potential for further rate adjustments. The rise in inflation was primarily attributed to gas and electricity prices falling less than they did a year ago, indicating ongoing economic pressures. Despite the increase, services inflation remains below the Bank's forecasts, suggesting a complex economic landscape ahead.