UK Inflation Surges Higher, Diminishing Rate Cut Expectations

LONDON (AP) — Recent data reveals that a spike in food and airfare prices has pushed U.K. inflation above market expectations for July. This development has tempered predictions regarding further interest rate cuts by the Bank of England for the remainder of the year.

Inflation Rates Climb

According to figures released by the Office for National Statistics, consumer price inflation rose to 3.8% in the year leading up to July, an increase from 3.6% in June. One significant factor contributing to this rise was airfares, which soared by an astonishing 30.2% between June and July—the largest increase since monthly data collection began in 2001.

Economic Projections Altered

Most economists had forecasted a more moderate inflation rise, predicting it would only reach 3.7%. With inflation now at its highest since January 2024 and nearly double the Bank of England’s target of 2%, the likelihood of another rate cut in 2025 appears to be diminishing.

Market Reactions and Implications

“July’s results probably eliminate the prospect of a September interest rate cut,” noted Suren Thiru, economics director at the chartered accountants institute ICAEW. He emphasized that strengthening underlying inflationary pressures raise questions about the ability of policymakers to ease monetary policy again this year.

Recent Interest Rate Adjustments

Earlier this month, the Bank of England reduced its main interest rate by a quarter of a percentage point to 4%, marking its fifth reduction within a year. This came as part of a series of cuts that initially started from a peak of 5.25%, the highest level in 16 years.

The Impact on Government and Consumer Confidence

The current inflation increase poses another challenge for the Labour government, which gained traction in power last July amidst a brewing cost-of-living crisis that had seen inflation soar over 11%.

Treasury chief Rachel Reeves acknowledged the ongoing challenges, stating there is “more to do to ease” the economic burden on households across the country.