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UK Inflation Stuck at 2.2% as Cheaper Petrol Balances Higher Air Fares

The UK’s annual inflation rate remained unchanged at 2.2% in August, compared to July, as lower petrol prices balanced higher air fares, the Office for National Statistics (ONS) said yesterday. That was in line with what City economists had forecast, and the way above what the Bank of England likens to its comfort zone of 2%. 

The good news is that from more than 10% a couple of months ago, inflation indeed came down to near negligible levels. However, as far as the policymakers are concerned, it is still way above the wished-for range. Energy and food prices have indeed not changed much lately but still, this one is causing a concern among the policymakers as it has come up to 2.2 percent in August, which was little short of what the Bank of England had predicted at 2.4%. Core inflation, however, improved to 3.6 percent, and that excludes items that are volatile in nature such as energy and food. 

Services inflation also was above high at 5.6% from July’s reading of 5.2% driven in good measure by rising air fares, mainly into Europe. The ONS said, even though gasoline prices have been slipping with the global economic slowdown, higher levels of air travel still put overall inflationary costs beyond where the Bank wants them. 

The pressure thus mounts on the Bank of England before the scheduled policy meeting with stability in the inflation rate. Despite labor pressure by the Trades Union Congress (TUC) amongst others, the Bank of England is likely to leave interest rates unchanged. According to General Secretary Paul Nowak, TUC, with inflation near the target and GDP growth stagnating, a rate cut may now be all that is now required by those struggling households. 

But economists, among them National Institute of Economic and Social Research’s Monica George Michail, expect strong service sector price pressures to keep the Bank on hold at current rates. Money markets reflect this view, as odds of no change in borrowing costs spiked to 73% following the release of inflation data. 

Households are still under tremendous strain, even with the recent easing of inflation: Gas is still 68% higher, and electricity 45% pricier than it was in March 2021. Chief Secretary to the Treasury Darren Jones observed that hard times are far from over for families: “Years of sky-high inflation have taken their toll, and prices remain much higher than they were four years ago.”. 

In the near future, experts believe that consumer restraint in spending on non-essential services may help to ease inflationary pressures for months to come. 

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