UK inflation rose to 2.2% in July

LONDON (Reuters) – British consumer price inflation rose to 2.2% after two months at the Bank of England’s 2% target, a slightly smaller increase than economists expected, and services inflation, closely watched by the BoE, slowed sharply, official data showed.

Economists polled by Reuters had forecast the annual headline CPI rate would rise to 2.3%.

Sterling fell sharply against the U.S. dollar after the data was published on Wednesday.

When the BoE cut interest rates from a 16-year high of 5.25% at the start of this month, it said May and June’s 2% inflation readings probably marked a low point for inflation.

The central bank expected CPI to rise to 2.4% in July and reach around 2.75% by the end of the year as the effect of sharp falls in energy prices in 2023 faded, before returning to 2% in the first half of 2026.

British inflation peaked at a 41-year high of 11.1% in October 2022 driven by a surge in energy and food prices after Russia’s full-scale invasion of Ukraine as well as COVID-19 labour shortages and supply chain disruption.

The BoE remains relatively focused on longer-term inflation pressures, including services prices and wages as well as general labour market slack.

Wednesday’s data showed that annual services price inflation fell to 5.2% in July from June’s 5.7%, lower than the Reuters poll forecast of 5.5% and the lowest since June 2022. BoE staff had predicted a drop to 5.6%.

Official data on Tuesday showed that annual wage growth excluding bonuses slowed to its lowest in nearly two years at 5.4%, in line with economists’ forecasts but still nearly double the rate the BoE sees as consistent with CPI staying at 2%.