Inflation remains above 2% target in second consecutive month

The Consumer Price Inflation (CPI) rose by 2.2 percent in the 12 months to August 2024, unchanged from July.

According to the Office for National Statistics (ONS) latest index, air fares increased, but this was balanced by lower fuel costs and slower price rises in restaurants.

The latest figures mean that prices are rising faster 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.

Commenting on the data, Grant Fitzner, chief economist at the ONS, said: "Inflation held steady in August as various price fluctuations offset each other.

"The main movements came from air fares, in particular to European destinations, which showed a large monthly rise, following a fall this time last year. This was offset by lower prices at the pump as well as falling costs at restaurants and hotels. Also, the prices of shop-bought alcohol fell slightly this month but rose at the same time last year. Following two months of growth, raw material prices fell, driven by lower crude oil prices, while the increase in the cost of goods leaving factories slowed again."

Air fares rose by 22.2 percent between July and August 2024. Fares usually rise between these months, but this was the second largest such rise since the monthly collection of prices began in 2001.

Meanwhile, motor fuel prices dropped by 3.4 percent in the year to August 2024, compared with a rise of 1.8 percent in the year to July.

The annual inflation rate for restaurants and hotels dropped to 4.4 percent in August 2024, down from 4.9 percent in July, marking the lowest rate since July 2021.

Darren Jones, chief secretary to the Treasury, said: "Years of sky-high inflation have taken their toll, and prices are still much higher than four years ago.

"So, while more manageable inflation is welcome, we know that millions of families across Britain are struggling, which is why we are determined to fix the foundations of our economy so we can rebuild Britain and make every part of the country better off."

The data comes after the Bank of England's Monetary Policy Committee voted to cut interest rates to five percent in August, a quarter-point reduction.

However, inflation remaining stubbornly above the two percent target will likely influence the MPC's policy at its meeting tomorrow. Most economists predict they will hold rates and wait until November before considering any more cuts to borrowing costs.

Core CPI, a key metric that influences the Bank of England's Base Rate decisions, has increased month-on-month. Core CPI monitors the change in prices of goods and services, excluding those from the food and energy sectors. In the 12 months to August, Core CPI rose by 3.6 percent, up from 3.3 percent in July.

Rachel Winter, partner at Killik & Co. “While the headline rate of inflation has stayed the same, the Bank of England will be disappointed by the higher core inflation figure. Core inflation excludes the traditionally volatile components of food and energy, and the recent uptick suggests there is still too much demand in the UK economy.

“This could put a September interest rate cut out of reach, and it also makes the case for future rate cuts more difficult this side of Christmas.

"For investors, as uncertainty around future rates lingers, the importance of maintaining a well-diversified portfolio across multiple asset classes remains. Short-term volatility is a concern as we approach Labour’s first Budget, and diversification will help to protect against sector-specific shocks.”

Suren Thiru, economics director at the Institute of Chartered Accountants in England and Wales (ICAEW) commented: “These figures suggest that inflation is in a difficult phase as stronger services sector price pressures helped keep the headline rate frustratingly above the Bank of England’s two percent target in August.

“The direction for UK inflation over the rest of this year looks largely locked in, with the boost to demand from a growing economy and higher energy bills in October likely to put inflation on a modest upward trajectory. “

Mr Thiru noted that although the rise in services inflation remains a significant obstacle to bringing the headline rate consistently to or below target, the increasing pressure on wages should help steer inflation on a more stable downward path.

He added: “An interest rate cut on Thursday is looking unlikely with the majority of the Monetary Policy Committee likely to want to assess the impact of next month’s budget before deciding when to loosen policy again.”

Amy Knight, personal finance expert at NerdWallet UK, noted that while inflation nearing its target is positive, feeding a family remains challenging. Grocery bills have risen by more than 20 percent since 2022 and around 13 percent in the past year.

She said: “Despite some signs of economic recovery, inflation has eaten up a large portion of worker's wage increases, straining household budgets. Though CPI appears to be stabilising, other measures – such as core inflation and services inflation – remain elevated, potentially delaying the interest rate cuts that would lift a little pressure off borrowers.

“Many feel they are still in the thick of the cost-of-living crisis and with the energy price cap pushing up energy bills this winter, cautious budgeting will continue. Shoppers can’t afford to be complacent: using online tools to compare the price of your food shop at supermarkets can help you make the most of your grocery budget.”