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.

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.

The pound edged up after the release while bonds were little changed. The market is betting the BOE will raise rates another 75 basis points to 6% by March, after data Tuesday showed wages rose at the fastest pace on record. The latest inflation reading did little to change that outlook. 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.

“While price rises are slowing, we’re not at the finish line,” Chancellor of the Exchequer Jeremy Hunt said. “We must stick to our plan to halve inflation this year and get it back to the 2% target as soon as possible.”

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 and Joel Rinneby.

(Updates with comment and market reaction from fifth paragraph.)

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