UK inflation remains stubbornly high, making the path to interest rate cuts fraught with challenges
In August, the UK's inflation rate remained at 3.8%, the highest level in a year and a half, prompting the Bank of England to remain cautious about interest rate cuts. Despite a decrease in airline ticket prices, the prices of fuel, dining, and hotels have risen, with food inflation climbing to 4.8%. The market expects the central bank to keep the interest rate unchanged at 4% and likely not to cut rates within this year. Compared to the United States and the Eurozone, the inflation situation in the UK appears to be more severe
According to Zhitong Finance APP, in August, the UK's inflation rate remained at its highest level in over a year and a half, a concerning figure that may lead Bank of England officials to adopt a cautious stance on further interest rate cuts.
The Office for National Statistics released data on Wednesday showing that the Consumer Price Index (CPI) rose by 3.8% year-on-year in August, unchanged from July's increase, which aligns with the predictions of the Bank of England and private sector economists.
Despite a decline in volatile airfares, rising fuel prices, dining, and hotel costs offset this impact. The food inflation rate continued to climb to 4.8%, marking the highest level since early 2024; while the service sector inflation rate fell to 4.7%, it still exceeds the acceptable range set by the Bank of England.
This data highlights the tricky dilemma faced by Bank of England officials: although the labor market is gradually cooling, policymakers are concerned that persistently high price pressures are continuously driving up consumer inflation expectations. The Bank of England anticipates that the inflation rate will peak at 4% in September, double its 2% target.
Markets expect that the Bank of England's Monetary Policy Committee will keep interest rates unchanged at 4% on Thursday and may pave the way for maintaining rates at this level for a longer period, thereby ending the "quarterly rate cut" rhythm maintained since last August. Currently, the market generally believes that interest rates will remain unchanged for the entire year, with only one more rate cut expected by the end of 2026.
Following the data release, the GBP/USD exchange rate showed little change, slightly below the two-month high reached on Tuesday; market expectations regarding interest rate trends also remained unchanged.
The UK appears "out of sync" among developed economies: the US inflation rate has fallen below 3%, and the market widely expects the Federal Reserve to announce a rate cut later today; while the Eurozone's inflation rate is approaching the European Central Bank's 2% target.
Zara Nokes, a global market analyst at JP Morgan Asset Management, stated: "The current inflation situation in the UK is becoming increasingly severe, and unfortunately, it may worsen further before it improves. The Bank of England is almost certain not to cut rates this week, and looking ahead to the year, unless there is a more significant deterioration in the labor market, the likelihood of another rate cut is becoming increasingly slim."
Due to the impact of summer travel times, UK airfares saw a month-on-month increase of 30% in July; however, in August, airfares only rose by 2.1% month-on-month. Since airfares rose by 22% in August last year, the data for this year effectively exerted a downward pressure on inflation.
Grant Fitzner, chief economist at the Office for National Statistics, pointed out that the slight increase in fuel prices and the decline in accommodation costs being lower than the same period last year offset the impact of falling airfares on inflation. The food price inflation rate has risen for the fifth consecutive month, with slight increases in the prices of various vegetables, cheese, and seafood, leading to a 0.4% month-on-month increase in food prices in August There are also more signs indicating that after the UK Labour Party raised payroll taxes and minimum wage standards in April this year, businesses are passing the increased costs onto consumers. Data from the UK Office for National Statistics shows that restaurant and hotel prices rose by 3.8% year-on-year, marking the fastest increase since November 2024 (shortly after the Labour Party announced the increase in employment taxes).
Other economic data also suggests that price pressures may persist. There are indications that the labor market has stabilized in recent months, and the growth of Gross Domestic Product (GDP) has been stronger than the Bank of England expected.
Monica George Michail, an assistant economist at the National Institute of Economic and Social Research, stated: "The data released today confirms that inflation is deeply entrenched." She added that the report corroborates "the price pressures from rising labor costs, high inflation expectations, and the upward risks from rising food prices."
Some rate setters are concerned about the rising household inflation expectations—this trend could trigger a vicious cycle: inflation expectations drive up wage demands, and rising wages further lead to price increases. Given the significant impact of food spending on household living, they are closely monitoring the sharp rise in food prices
