Key events
Dales explained:
By staying at 5.7% in June, services inflation remained well above the 5.1% rate in June that the Bank of England forecast back in May. Admittedly, a lot of that overshoot happened in April and May. And that didn’t stop the BoE from sounding a bit dovish at the subsequent June policy meeting.
Even so, the BoE expected services inflation to fall 0.2 percentage points in June, which didn’t happen. And only some of the stickiness of services inflation in June may be due to the influence of Taylor Swift’s concerts. They may have been behind some of the large rise in hotels inflation from 7.0% to 9.8%. But cultural services inflation, which would capture any influence from the ticket prices, dipped from 7.4% to 7.3%. As a result, it’s not obvious that the BoE can ignore a chunk of the stickiness of services inflation.
Paul Dales, chief UK economist at Capital Economics, said:
Even though consumer prices index inflation stayed exactly in line with the 2.0% target in June, it’s the stability of services inflation at 5.7% that’s the blow.
And it looks as though only a small part of that may have been due to the temporary effects of Taylor Swift’s concerts. As a result, the chances of an interest rate cut in August have diminished a bit more.
Economists talk of Taylor Swift effect on prices
Taylor Swift may have put pressure on UK inflation as fans splashed out on costly concert tickets, hotels and meals out. The American singer toured Edinburgh, Liverpool, Cardiff and London in June.
However, economists say that the Bank of England is likely to be more worried about sticky services inflation due to higher wages, which remained at an annual rate of 5.7% in June.
Luke Bartholomew, deputy chief economist at the investment firm abrdn, said:
Today’s inflation report will keep the Bank of England’s August rate decision on a knife edge. The strength of hotel price growth is suggestive of a so-called Taylor Swift effect on prices, but policy makers will almost certainly look through this kind of dynamic.
More fundamentally, the ongoing stickiness of services inflation will leave the Bank wondering how long inflation will stay at the 2% target once favourable base effects have passed and domestic price pressures start to drive headline inflation again. Tomorrow’s wage data will provide more clues about these price pressures, and the Bank will hope to see a further moderation in wage growth. For now, we continue to expect a rate cut in August, but this will require the upcoming data to cooperate.
In May, inflation hit the Bank of England’s target of 2% for the first time in nearly three years.
Financial markets see a near-50% chance of a rate cut at the central bank’s next meeting on 1 August.
The pound rose slightly on the higher-than-expected inflation data, and is trading at $1.2977. It has gained nearly 2% against the dollar this year.
Ipek Ozkardeskaya, senior analyst at Swissquote Bank, said:
The data showed that inflation in Britain stagnated in June versus the expectation of a further easing. And higher-than-expected figures cooled down the expectation of an August rate cut from the Bank of England.
But because the September Fed rate cut is already fully priced in, there is still room for a dovish BoE pricing into late summer – which means that we shall still see a limited upside potential in Cable: the $1.30 level could be hard to clear.
Introduction: UK inflation stays at 2% in June
Good morning, and welcome to our live coverage of business, economics and financial markets.
It’s inflation day in the UK today.
The headline annual inflation rate stayed at 2% in June, unchanged from May, according to the Office for National Statistics. Analysts had expected a further dip to 1.9%.
Inflation was last lower than this in April 2021, when it stood at 1.5%. On a monthly basis, the consumer prices index rose by 0.1% in June from May.
The largest upward contribution to inflation came from restaurants and hotels, where prices of hotels rose more than a year ago; the largest downward contribution came from clothing and footwear, with prices of garments falling this year having risen a year ago.
The core rate of inflation, which strips out energy, food, alcohol and tobacco, stayed at 3.5%.
The inflation figures will be the last the Bank of England sees before it decides on 1 August whether to cut interest rates from their current level of 5.25%.
Darren Jones, chief secretary to the Treasury, said:
It is welcome that inflation is at target, but we know that for families across Britain prices remain high. We face the legacy of fourteen years of chaos and economic irresponsibility. That is why this Government is taking the tough decisions now to fix the foundations so we can rebuild Britain and make every part of Britain better off.
The Agenda
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