Stay informed with free updates
Simply sign up to the UK inflation myFT Digest — delivered directly to your inbox.
The key points
-
In August, the key measures of annual underlying inflation rebounded, while headline inflation was flat.
-
Both headline and services inflation still undershot the BoE’s most recent forecasts, so the release does not undermine the bank’s strategy of implementing further cuts later this year.
The verdict
The August inflation data is not weak enough to justify imminent cuts and we continue to expect the Bank of England to hold the benchmark rate at this week’s meeting. Nevertheless, the trajectory of inflation that this release suggests is encouraging. We continue to expect the BoE to deliver its second cut of the cycle in November.
The details
In August, annual headline CPI inflation came in at 2.2 per cent, flat on July’s figure and in line with market expectations, though slightly below the Bank of England’s forecast of a 2.4 per cent rise.
Measures of underlying inflation showed slightly less progress, though the overall direction of travel remains positive.
Core inflation rose at an annual pace of 3.6 per cent, slightly above market expectations of a 3.5 per cent increase and above July’s 3.3 per cent rate.
Services inflation also rebounded on July but undershot the BoE’s forecast, rising 5.6 per cent compared with policymakers’ expectations of a 5.8 per cent rise.
The overall message of Wednesday’s release is that underlying inflation is still too high and sticky to justify an imminent cut. Disinflation in the UK is happening gradually and does not warrant a surprise easing. We think Tuesday’s market move to price in a September BoE cut was driven by the repricing of Fed rates, and we do not share that view.
Yet while a cut in September still looks unlikely, this release also contains nothing that counters a cut in November if future trends continue to be positive.
The fact that both headline and services inflation undershot the BoE’s forecasts will doubtless be seen as encouraging by policymakers. Governor Andrew Bailey had recently said that “we are now seeing a revision down in our assessment of that intrinsic persistence [but] this is not something we can take for granted”.
This release will not give him or other swing voters on the MPC that confidence.
There were some volatile parts of inflation holding the figure higher. Air fares were strong in August compared with weakness in 2023, which will probably fade out next month, but this is not a sufficient basis to justify an imminent rate cut, in our view, when the whole committee agreed not to cut rates “too much or too quickly”.
We continue to expect the BoE to deliver a second 0.25 percentage point cut in 2024, likely in November.
In charts
More from Monetary Policy Radar
UK wage slowdown suggests gradual disinflation is on track
Private sector pay growth continues to decelerate though it remains too high for a September cut
Three things we learnt during Jackson Hole week
Central bankers gave fresh guidance about the policy trajectory. Here are the key takeaways
