ONS figures out today confirm that inflation remains at 2 percent, prompting calls for the Bank of England (BoE) to lower interest rates to take the brakes off growth.
However, the fact that inflation “flatlined”, rather than fell, leaves the likelihood of an August rate cut hanging in the balance, according to economic commentators.
The data showed that the consumer prices index (CPI) was 2 percent in the 12 months to June 2024, the same rate as the 12 months to May 2024.
There was no movement for the consumer prices index including owner occupiers’ housing costs (CPIH) either, which stayed at 2.8 percent in the 12 months to June 2024.
BoE policy ‘too tight’
George Dibb, associate director for economic policy at IPPR, said these figures confirm that inflation is well on its way towards normalisation.
He said: “Some inflation drivers, such as core inflation, are still elevated, but the BoE’s policy stance remains too tight. Interest rates have been too high for too long and need to come down to not hamper growth.”
Dibb called for recognition of the critical role that investments in the clean energy transition will have in shielding the country from future inflationary shocks in international oil and gas markets.
“Additionally, a record number of people have left the labour force, often due to illness, harming our economic potential. Addressing NHS failures will be critical to solving our dire labour market situation,” he added.
Rate cut predictions
Martin Sartorius, principal economist at the CBI, said that many people are yet to feel the benefit of lower inflation due to the high level of prices, particularly for food and energy bills.
“Today’s data paves the way for an interest rate cut next month, which would begin to provide some relief for firms and households that are struggling with high borrowing costs,” he said.
“Going forward, the BoE’s Monetary Policy Committee will be mindful of potential upside risks to inflation in the near-term as the domestic growth outlook improves. They are also likely to move carefully as they assess the impact of the first rate cut in four years.”
High prices sticky
James Smith, research director at the Resolution Foundation, said that while inflation had remained at 2 percent, it had also “showed signs of ‘stickiness’” as more domestically-driven services inflation stayed at 5.7 percent.
“While it is welcome news that inflation is at the BoE’s 2 percent target, the high price of essentials – with energy prices up by 53 percent since July 2021, and food prices by 31 percent – will be with us for the foreseeable future.
“The combination of a sustained high price level, continued uncertainty about the size and timing of BoE rate cuts, and sticky services inflation means that families will continue to feel the effects of the high cost of living.”
Taylor Swift effect
Laura Suter, director of personal finance at AJ Bell, said the BoE policymakers may be cursing Taylor Swift, as fans spending on hotel rooms and in restaurants during her Eras tour is likely to be one reason that prices rose in June “meaning that overall inflation flatlined at 2 percent rather than fell”.
Suter said: “A fall to 1.9 percent had been predicted but didn’t materialise, putting the decision about a potential interest rate cut on 1 August finely in the balance. The odds are around 50:50 as to whether we will see the first rate cut from the BoE next month – a move that would be welcomed by the public and the new government alike.
“All eyes will now be on tomorrow’s wage figures as a further indicator of whether the Bank will start its rate cutting cycle in a couple of weeks. But hot on the heels of strong GDP figures and a warning from the IMF that rates may have to stay higher for longer in the UK, some will be forecasting no cut this summer.”
King’s speech
The data comes out on the same day as the King’s speech at the state opening of the new parliament. King Charles is expected to unveil a raft of bills to unlock growth and improve living standards for working people.
Ahead of the speech, prime minister Keir Starmer said: “Now is the time to take the brakes off Britain. For too long people have been held back, their paths determined by where they came from – not their talents and hard work.
“I am determined to create wealth for people up and down the country. It is the only way our country can progress, and my government is focussed on supporting that aspiration.”
