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Inflation rises again, but silver lining lies in services inflation

Journalist: John Choong (Head of Markets and Research), Newspage

ended 14. August 2024

The Headline Consumer Price Index (CPI) came in at 2.2% in July, back above the Bank of England’s (BoE) 2% inflation target. However, it’s worth highlighting that this was expected by the Monetary Policy Committee (MPC), as the effects of lower energy prices are no longer helping to keep the overall inflation rate down.

The positive news, however, is that the stickier elements of inflation continue to fall, albeit at a slow pace. Core inflation fell to 3.3% from 3.5%, and in line with consensus estimates. But more crucially, services inflation dropped to 5.2% from 5.7%, below the BoE’s forecast of 5.6%. As a result, despite headline inflation rising again, it came in below consensus estimates of 2.3% and the BoE’s projection of 2.5%.

Most notably, the more susceptible parts of services inflation in hotels and restaurants continued to see their inflation rates trend downwards. And with wage growth also cooling after yesterday’s data, the outlook for services CPI looks increasingly promising.

A list of responses from financial experts can be found below.

9 responses from the Newspage community

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Wes Wilkes
CEO at IronMarket Wealth
With this morning's data, it almost looks like the Bank of England and MPC might just know what they’re doing. The slight rise in headline inflation was very much expected and indeed predicted although slightly under consensus. What is most surprising, is the steeper-than-expected fall in the sticky services inflation measure. The Bank now has a tricky period — wage growth is slowing, services inflation has slowed further than expected, and headline inflation is around their 2% target. All of which gives a good rationale for a cut, however, consensus is that they will pause in September meaning November will be their next opportunity.

There is definitely a window for policy error here should they likely pause in September as the data weakens further and faster than expected. Assuming they don’t cut in September, we may then see cuts in both November and December starting 2025 at a 4.50% Base Rate.
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Stephen Perkins
Managing Director at Yellow Brick Mortgages
The fall in core and services inflation will give reassurance to the Bank of England around their last base rate decision. These figures also will not scare them from future rate cuts. However, in line with their commitment to no drop rates too fast, I believe they will choose to hold in September and cut again in November.
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Chris Barry
Director at Thomas Legal
Today’s news of 2.2% inflation is positive news for the UK economy.

The huge drops we have seen over the course of this year have been mainly due to corrections in the energy and food spike caused by the war in Ukraine.

The more worrying point whilst headline inflation sat at 2% was that services inflation remained high. However, to see services CPI start to show a meaningful downward trend is really encouraging.

The conclusion by most will be that the MPC will be keen to delay a further rate cut but digging into the underlying data, a cut in the coming months might now be more likely.

The key indicators will be car manufacturers, retailers, and think tanks all reporting a decline in non essential spending.
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Andrew Montlake
Managing Director at Coreco
This latest data is all about what lies beneath the headlines, where there is a lot of good news. Both core and services inflation have continued to fall and these will be the main drivers for any future rate cut. Although many believe nothing will now happen until November, a back-to-back further cut in September remains a distinct possibility, especially if the Fed across the pond act aggressively. As the mortgage rate war hots up, it seems the autumn will see a busy housing market.
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Dariusz Karpowicz
Director at Albion Financial Advice
This rise in inflation isn't a surprise given the current high cost of borrowing. With the base rate where it is, businesses are feeling the pinch, holding back on investments, and raising prices to stay afloat. While the drop in services inflation is promising, it might not be enough to convince the MPC to cut rates again in the next meeting. We could be in for a wait before we see any real relief.
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Ken James
Director at Contractor Mortgage Services
Inflation is up again! But as is often the case, this does not reflect the bigger picture, with lots of data on the core and services front showing positive signs of coming down.

The MPC will have factored this possible increase into the latest decision. Therefore, most people believe another rate cut may be on the back burner to the end of the year and this morning's news will reinforce this view for many.

Consumers are coming back to the market, and with all the lenders reducing rates — some even below the magical 4% mark, there has been a flurry of enquiries which has shown that confidence has begun to return. With a more positive outlook and a strong tailwind, we may sail into a very busy end to the year.
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John Choong
Head of Equities and Markets at Interpretiv
Headline inflation may have risen in July, but the MPC was well aware of this, as the negative year-on-year growth in energy prices which had kept inflation at 2%, have now dissipated. What the MPC will be delighted with, however, is the fact that the stickier elements such as services inflation, continued to trend down, and way more than the Bank’s forecast.

Considering that the bulk of committee members are more cautious than not about instigating further rate cuts until services inflation shows a more sustainable path downwards, this is a positive development and puts a September rate cut back on the map, especially if August’s print comes in lower than forecast as well.

Even so, the MPC are still likely to stick to their cautious stance, as any easing of their cautious tone may result in lower bond yields. This would result in cheaper lending, and thereby boost consumer spending, which would therefore, make it more difficult for services inflation to ease.
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Riz Malik
Independent Financial Adviser at R3 Wealth
A rate cut in September appears unlikely, and with no meeting in October, November could be when we see the second rate cut of the year. Services inflation and labour market data will continue to play a crucial role in the MPC's decision-making but today they can breathe a sigh of relief. Given that services inflation saw its largest drop of the year, all attention is now focused on November.
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Rob Gill
Managing Director at Altura Mortgage Finance
Today’s inflation figures are good news, with every measure below expectations, including the much-watched core and services numbers. This leaves a September base rate cut very much on the table and should allow lenders to carry on cutting mortgage rates.