The prospects of an August interest rate cut took a hit as higher hotel prices stalled progress in the UK’s inflation battle last month.

The government’s preferred inflation measure remained at its 2% target for the second consecutive month in June.

Sharp drops in clothing prices, driven by retailers offloading summer stock, were offset by rising hotel costs, the Office for National Statistics (ONS) reported.

Other key price measures also showed no improvement in June. Core inflation, which excludes food, energy, alcoholic drinks, and tobacco, held steady at 3.5%. Inflation in the services sector, closely monitored by the Bank of England, remained at 5.7%.

Hotel prices saw an 8.8% annual rise in June compared to a modest 1.7% increase a year earlier. Analysts attributed this spike partly to the demand surrounding the UK dates of Taylor Swift’s global Eras tour.

“Even though CPI 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.”
Paul Dales

The June inflation figures are the last set before the Bank of England’s 1 August decision on whether to cut interest rates, which currently stand at 5.25%.

After the ONS data release, financial markets reduced their forecasts for an August rate cut from 50% to 35%.

Expert Views On Inflation Figures

Luke Bartholomew, deputy chief economist at the fund manager Abrdn, stated, “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 Taylor Swift effect on prices, but policymakers will almost certainly look through this kind of dynamic.”
Luke Bartholomew

Although financial markets had anticipated a fall to 1.9% last month, as measured by the Consumer Prices Index (CPI), the ONS noted that inflation remains at its joint lowest level in nearly three years.

The annual increase in the cost of living was last lower in April 2021, when it stood at 1.5%.

Overall prices rose by 0.1% last month, matching the increase from June 2023.

Food price inflation continued to ease, dropping from 1.7% to 1.5%, while clothing and footwear prices increased by 1.6% in the year to June, down from 3% in May. Inflation in hotels and restaurants rose from 5.8% to 6.3%.

The Bank of England’s nine-member monetary policy committee expects inflation to rise to 2.5% in the latter half of 2024 before falling below the official 2% target.

ONS chief economist Grant Fitzner said, “Hotel prices rose strongly while secondhand car costs fell but by less than this time last year. However, these were offset by falling clothing prices, with widespread sales driving down their cost.”

Darren Jones, the chief secretary to the Treasury, remarked, “It is welcome that inflation is at target, but we know that for families across Britain, prices remain high.”

“We face the legacy of 14 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.”
Darren Jones

George Dibb, associate director for economic policy at the IPPR think tank, said, “Today’s data confirms that inflation is well on its way towards normalization.”

“Some inflation drivers, such as core inflation, are still elevated, but the Bank of England’s policy stance remains too tight. Interest rates have been too high for too long and need to come down to not hamper growth.”
George Dibb

The fight against inflation continues, and the impact on interest rates remains uncertain as the UK navigates through fluctuating economic indicators.