UK Holiday Costs Drive Stronger-Than-Expected Inflation

UK inflation remained higher than expected last month as the cost of travel and holidays climbed, adding to the case for the Bank of England to raise interest rates again.

(Bloomberg) — UK inflation remained higher than expected last month as the cost of travel and holidays climbed, adding to the case for the Bank of England to raise interest rates again.

The Consumer Prices Index rose 6.8% in July, exceeding the 6.7% rate expected by economists, the Office for National Statistics said Wednesday. It was the fifth time in six months the figures surprised on the upside. Inflation remains more than triple the BOE’s 2% target.

The market for the most part shrugged off the release. Traders had already ramped up bets on further hikes Tuesday after data showed wages rising at a record pace. They’re pricing in another 75 basis points of increases to 6% by March.

Read More: Why UK Inflation Is So High and Tough to Bring Down: QuickTake

While falling energy and food price inflation brought the headline rate down from 7.9% in June, the cost of services accelerated by 0.2 percentage points to 7.4%, matching highs touched in May and in 1992. 

The price of airline tickets and hotels increased rapidly. There also was a 1.7% increase in the cost of renting property — mainly from state-supported housing.

Coupled with a record surge in wages reported on Tuesday and surprisingly strong growth, the figures strengthen the sense that Britain is suffering the worst inflationary spiral in the Group of Seven nations. Investors have revived speculation the BOE will deliver a quarter point rate hike or more next month.

Neil Birrell, chief investment officer at Premier Miton Investors, said the data showed the BOE had “no room for complacency.”

“We are not yet at the stage in the UK that we can say that we are winning the battle on inflation, there are too many pressures,” he said.

Bonds were little changed, while pound edged up after the release. Sterling climbed as much as 0.2% to $1.2732, set for a second day of gains.

Britain has suffered the worst inflation in the Group of Seven since the start of the pandemic. The latest inflation figures were 5.3% in the euro area, 3.2% in the US and 3.3% in Japan.

Prime Minister Rishi Sunak’s government has made fighting inflation a priority ahead of the election that’s widely expected next year.

“We’re not out of the woods yet,” Treasury minister Gareth Davies said on Bloomberg TV on Wednesday. “We’ve got a long way to go, we’ve got to stick to the plan. We need to make sure fiscal policy is aligned with monetary policy. We’re certainly not complacent, despite the significant reduction announced today.”

What Bloomberg Economics Says …

“The stubbornness of core and services inflation in the July CPI print will only stand to reaffirm concerns at the Bank of England about the persistence of price pressures. With wage growth still running red hot, the prospect of a more meaningful cooling in domestically generated inflation remains a distant prospect. We think that’s likely to prompt the central bank to lift rates in September and November.”

—Dan Hanson and Ana Andrade, Bloomberg Economics. Click for the REACT. 

Heidi Karjalainen, a research economist at the Institute for Fiscal Studies, said the government’s goal to cut inflation in half this year is at risk.

“There is only so much the Treasury can do to influence the pace of price increases,” she said. “With only four months to go, it no longer seems at all clear that inflation at the end of the year will have fallen by enough to achieve it.”

The core rate of inflation, excluding food and energy prices, held at 6.9% in July instead of ticking down as economists had expected.

For low-income households that tend to spend more of their income on food bills, there was some good news as the rate of food inflation slowed. Though still high at 14.9%, it was the slowest growth rate since September 2022.

Basics such as milk, breakfast cereals, bread and crumpets drove the fall, and 10 of the 11 detailed food classes saw a fall in inflation. Three of those ten classes saw prices fall between June and July.

The Resolution Foundation noted that the fall in inflation from 10.1% in January was the sharpest for a six month period since September 1992.

Inflationary pressures subsided in the manufacturing sector. Raw materials costs continued to decline, raising the prospect of a further falls in inflation in the coming months. 

Prices charged for goods leaving the factory gate fell 0.8% in the year to July – the first negative reading since December 2020 and the lowest since October 2020.

Pay is on track to be rising faster than CPI inflation for the first time since October 2021 after a sharp fall in inflation in July, providing households some long-awaited respite in the cost of living crisis. Regular pay, excluding bonuses, increased 7.8% in June and is expected to exceed the current 6.8% headline rate of inflation in next month’s official release.

Households have suffered a severe real-terms income squeeze since energy prices started rising even before Russia’s invasion of Ukraine last year. At its lowest point in June 2022, real annual wage growth was contracting 4.1%.

–With assistance from Alex Mortimer, Constantine Courcoulas, Joel Rinneby and Joe Mayes.

(Updates with comment from Treasury minister.)

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