UK inflation rate set to rise again

Inflation is poised to rise again, weeks after the Bank of England decided to cut interest rates for the first time in more than four years, figures due to be published this week are expected to show.

City analysts think that the rate of prices growth rose to 2.3 per cent in July, having held steady at 2 per cent in the previous two months, in line with the central bank’s target.

The latest numbers will provide evidence of how the economy has fared in the first month under a Labour government. The Office for National Statistics also will also provide updates on the pace of economic growth, the state of the labour market and retail sales.

Gross domestic product is projected to have increased by 0.2 per cent over the month to June, taking the quarterly growth rate to 0.7 per cent, unchanged from the previous three months, which was the steepest rise in the G7 group of wealthy nations.

BDO, the consultancy, said that its output index had accelerated at the quickest pace in two years in July, propelled by the manufacturing sector and the summer tourism season.

Sir Keir Starmer has pledged to raise economic growth to 2.5 per cent over the long term and to make Britain the fastest-growing economy in the G7. However, analysts have cast doubt on the chances of achieving that aim without a significant increase in investment.

“Supporting the economy in June was likely the boost to hospitality from the start of the European football championships, which Barclays reported to have resulted in greater expenditure in pubs,” analysts at Investec said.

Unfavourable comparisons with energy prices last year are set to have pushed the headline rate up in July. Sanjay Raja, chief UK economist for Deutsche Bank, said that “positive base effects, mainly from energy prices, will likely push headline inflation higher through the second half of 2024. But there is good news. Services inflation should continue its descent, albeit gradually”

Services inflation, which stood at 5.7 per cent in June, has been closely watched by the Bank as it decides whether or not to cut interest rates. At its ratesetting committee’s meeting this month, when the base rate was lowered by a quarter-point to 5 per cent, it said that it was now placing greater emphasis on general trends in the economy rather than on a single indicator.

International economic data releases also have the potential to spark sharp movements in stock markets this week. Asian, European and American share prices fluctuated widely last week after figures showed that the US economy had added only 117,000 jobs in July, a sharp slowdown from June and well below Wall Street analysts’ predictions, raising concerns about a recession.

Fresh estimates released by the US Bureau of Labor Statistics on Wednesday are expected to show that inflation ticked down to 2.9 per cent on an annual basis in July from 3 per cent in the previous month in the world’s largest economy.

After the weak jobs figures and last week’s global stock market turmoil, investors priced in an aggressive round of policy loosening by the US Federal Reserve, with some predicting an emergency interest rate cut before the Fed’s next meeting on September 18. According to the latest average market prediction, the Fed will cut the federal funds rate by a whole percentage point this year from a 23-year high range of 5.25 per cent to 5.5 per cent.