Steady Inflation Rate at 3.8% before Bank of England Meeting Approaches
Inflation held steady at 3.8% in August, according to the latest report, marking no change compared to July. This comes as Chancellor Rachel Reeves acknowledged the challenges faced by many households as cost pressures pick up again.
The report showed that core and services inflation slowed compared to July, with core Consumer Prices Index (CPI) coming in at 3.6% and services CPI at 4.7%. However, many are bracing themselves for a reading of 4% in September's report, as some forecasters, such as Oxford Economics, predict inflation will inch up to 3.9% tomorrow.
Fuel prices rose this August after falling a year ago, with the average price of petrol increasing by 0.3 pence per litre and diesel by 0.8 pence per litre. This upward pressure on prices is expected to continue, as hotel prices jumped in July, partly off the back of the Oasis reunion tour, and could add pressure in August as well.
Airfares made the largest downward contribution to the monthly change in CPI, while restaurants & hotels and motor fuels added upward pressure. Food inflation, a category driving inflation higher, rose by 5.1% on an annual basis in August, marking a fifth consecutive increase in this category. Rising food prices are a consequence of higher labor costs due to the increase in employers' National Insurance contributions and the minimum wage.
The Bank of England's interest rate decision is due at midday tomorrow. Traders are pricing in just one more rate cut between now and the end of 2026. However, some economists, such as ING, still think a rate cut could occur in November 2022, with more potential cuts in 2026.
The US Federal Reserve has a possible further visibility of rate cuts compared to the Bank of England in September 2025. Slowing services and core inflation suggests that underlying price pressures are becoming less sticky.
Under the triple lock policy, state pension payments are uprated annually in line with inflation, earnings growth, or by 2.5% - whichever measure is highest. September's CPI report will play a role in setting the state pension for 2026/27.
House price inflation slowed to 2.8% in July, down from a revised estimate of 3.6% in June. The typical UK property price is around £270,000, which is around £8,000 higher than a year ago. Mortgage borrowers may find an inflation reading of 3.8% to be bad news, as it could cause markets to become more cautious on the longer-term outlook for rate cuts, impacting mortgage pricing.
One way to protect cash savings is to find an account offering real returns, such as inflation-beating interest rates. The next CPI report will be published on October 22, with the remaining dates for 2025 available on the CPI release calendar.
The Bank of England is worried about food inflation and its potential impact on household inflation expectations. Economists polled by Bloomberg and Reuters were unanimous in ruling out a September rate cut. Despite these challenges, it's crucial for households to stay informed and make informed decisions about their finances during these uncertain times.
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