Stay up to date with free updates
Just register inflation in the UK myFT Digest – delivered straight to your inbox.
UK inflation rose less than expected to 2.2% in July as underlying price pressures eased sharply, opening the door to further interest rate cuts by the Bank of England this year, official data showed.
The annual rise in consumer prices reported on Wednesday by the Office for National Statistics was below the expectations of economists polled by Reuters, who had forecast a rise of 2.3%.
But the reading was still above the Bank of England's 2 percent inflation target and marked the first rise this year. Price growth slowed to 2 percent in for the first time in three years in May and remained stable in June.
The central bank Inflation was expected to rise to 2.4% due to a smaller impact from domestic energy bills, but slower growth in hotel spending helped bring the figure down.
Services price inflation, the Bank of England's key measure of domestic price pressures, fell more than expected, from 5.7% in June to 5.2% in July, the lowest since June 2022. Analysts had expected a decline to 5.5%, while the Bank of England had forecast only a marginal fall to 5.6%.
Ruth Gregory, an economist at consultancy Capital Economics, said “weaker-than-expected growth” in consumer prices and “a sharp fall in service sector inflation” would “reassure the Bank of England… and open the door to further interest rate cuts this year.”
Wednesday's data comes out after The Bank of England has cut interest rates On August 1, for the first time since the beginning of the COVID-19 pandemic.
Annual core inflation, which excludes food and energy, fell to its lowest level since September 2021 in July at 3.3 percent, down from 3.5 percent in June.
Following the release of the data, the pound sterling fell against the US dollar, with the pound falling 0.23% to $1.2828.
British government bonds rose, with the yield on the rate-sensitive two-year UK government bond falling 0.06 percentage point to 3.55 percent as investors increased their bets on two more interest rate cuts by the Bank of England before the end of the year.
Rob Wood, an economist at consultancy Pantheon Macroeconomics, said there was “no doubt” that the fall in service price growth supported the Bank of England's argument that “inflationary pressures are fading, requiring further interest rate cuts”.
However, he warned that the decline in services inflation was partly due to volatile air and hotel prices, meaning the Monetary Policy Committee was unlikely to cut rates again at its meeting in September.
The annual rise in restaurant and hotel prices fell to 4.9% in July from 6.2% in June, the ONS said, and was the biggest drag on the overall rate.
«Inflation “They rose slightly in July because, although domestic energy spending fell, it fell less than a year ago,” said ONS chief economist Grant Fitzner. “This was partly offset by hotel spending, which fell in July after a strong rise in June.”
The BoE expects UK inflation to rise slightly in the second half of this year to 2.8% by December as the temporary drag from energy prices wears off. It expects consumer price inflation to ease to 2.2% by the end of 2025, 1.7% by 2026 and then 1.5% in 2027.
Official figures were released on Tuesday. showed annual wage growth Excluding bonuses, the underlying price pressure indicator slowed to its lowest level in almost two years, 5.4%.
After cutting the benchmark interest rate by a quarter point this month to 5 percent, Bank of England Governor Andrew Bailey said: “We need to make sure inflation remains low and be careful not to cut interest rates too quickly or too much.”
Katherine Mann, MPC External Member, said this week The UK must not be “swayed” into the idea that the fight against inflation is over after a short-term cut in the headline rate.
The Treasury had forecast a rise in inflation in July, and Conservative officials said it was a minor factor in former Prime Minister Rishi Sunak's decision to call an election in July.
For the Labour government, the small rise in inflation is a reminder of the challenges facing Chancellor Rachel Reeves, who wants to boost growth but knows the Bank of England will remain wary of cutting interest rates further in the short term.
Commenting on the inflation data, Darren Jones, chief secretary to the Treasury, said the government was “under no illusions about the scale of the problem we have inherited”.
“That's why we are now taking difficult decisions to fix the foundations of our economy and rebuild Britain,” he added.
Shadow chancellor Jeremy Hunt said the figures showed “how important it is that the new Labour government follows the path of the previous Conservative government”. Reeves “must not use these figures as an excuse to break her promises and raise taxes”, he added.
In the euro zone, inflation rose to 2.6% in July from 2.5% in July. Later on Wednesday, separate data is expected to show that annual inflation in the U.S. was unchanged at 3% in July.