Inflation in the United Kingdom is predicted to stay above its 2.2% target for the remainder of 2024, having increased to 2.5% in July, its highest level since December 2023.
Based on data from the Office for National Statistics (ONS), the government’s preferred indicator of living expenses increased once more last month despite a decrease in household energy bills compared to July 2023.
July’s increase was not an isolated incident, according to Gabriella Dickens, the G7 economist at Axa Investment Managers. As long as there is no repeat of the significant drops in energy prices in 2023, the headline rate will rise once more in the coming months.
“We project slightly higher-than-2.5% annual inflation by year’s end,” Dickens stated.
Earlier in August 2024, the Bank of England had stated that it anticipated that the consumer price index, which measures inflation, would keep rising and peak at roughly 2.75%.
Even though the financial markets had projected an increase to 2%, July 2024’s increase was marginally less than that, which led to rumours of potential consecutive interest rate cuts when Threadneedle Street’s monetary policy committee met the following month.
Early this month, the cost of borrowing was reduced from 5.25% to 5%. Savings on hotel stays contributed to a 0.2% decrease in prices in July, but this was less than the 0.4% decrease in prices in July 2023, when energy costs fell precipitously, increasing the headline rate of inflation.
In July 2023, the energy price cap, which is regulated by Ofgem, decreased by 8 points, but in the same month this year, it decreased by 7 points.
The chief economist at the ONS, Grant Fitzner, stated, “Inflation increased slightly in July even though domestic energy prices decreased, but not by as much as they did a year ago. Hotel expenses, which experienced significant growth in June, decreased in July, somewhat offsetting this.”
Talking about the GDP growth, the British economy put up a strong show in the second quarter of 2024 as it recovered from last year’s shallow recession, before losing momentum in the second half of this year, thereby suggesting the Bank of England remains on course to cut interest rates again.
GDP grew 0.6% in the second quarter of 2024 after a 0.7% expansion in the first quarter which was the fastest in more than two years, the Office for National Statistics said. However, in June alone, monthly output growth slowed to zero from 0.4% in May, as heavy rain hurt retail sales and a doctor’s strike contributed to a 1.5% drop in healthcare activity.
Uncertainty in the run-up to July 4’s election, which saw the Labour Party win a large majority after 14 years in opposition, might also have weighed on growth in June, said Thomas Pugh, economist at accountancy firm RSM UK, while interacting with Reuters.
“Overall, the UK economy has shown a solid performance in the first half of the year, but we need to see signs of rising incomes and confidence feeding through into actual spending and investment to drive growth over the next year,” he said.
Suren Thiru, economics director at the Institute of Chartered Accountants in England and Wales, expected quarterly growth to slow as interest rates remained near a 16-year high, despite this month’s BoE interest rate cut. Wage growth was also likely to moderate and a long-term productivity problem persisted.
At the start of August 2024, the BoE raised its annual growth forecast for 2024 to 1.25% from 0.5% due to a stronger-than-expected beginning to the financial year and an expectation of 0.7% quarter-on-quarter growth in the three months to June.
However, the central bank was less upbeat about the outlook for the remainder of 2024, seeing growth slow to 0.4% in the third quarter and 0.2% in the final three months of the year, which it views as closer to the economy’s underlying growth rate.