The Bank of England is poised for a setback in the battle against high inflation this week amid expectations for a first increase in the headline rate this year, highlighting the pressure from the cost of living crisis, (The Guardian) newspaper said.
The Bank of England on Thursday delivered its first interest rate cut in more than four years, taking the key rate to 5%.
In a week of key updates from the British economy, official figures on Wednesday are expected to show inflation returned above the Banks 2% target in July, driven in part by fast-rising prices for air fares, package holidays and hotels, the paper said.
The Guardian quoted economists as saying that headline inflation was on track to increase to 2.3%, having previously held steady at the 2% target for two consecutive months in May and June, in what would mark the first increase since December 2023.
The predictions, the paper said, come after a smaller decline in household energy prices in July compared with the same month a year ago, when pr
ices fell sharply, meaning that the year-on-year inflation rate is set to increase.
Analysts said that while inflation in services prices was slowing, price growth in this dominant sector of the British economy was on track to remain above 5%, fuelled by air fares, package holidays and hotel prices.
It comes after a sharp rise in the price of one-night stays this year, partly reflecting new seasonal patterns since the lifting of Covid lockdowns, and as hotels deploy surge pricing to respond to increases in demand.
Inflation has fallen back sharply from a peak of 11.1% in October 2022 after Russian-Ukrainian war triggered an explosion in energy prices, The Guardian said.
Threadneedle Street has warned that inflation is likely to rise to about 2.75% in the second half of this year, driven by service sector price rises and a resilient UK jobs market. However, it forecasts these inflationary pressures will gradually fade, taking headline inflation back to 1.7% in two years’ time, before a fall to 1.5% in 2027
, the paper added.
The Bank of England is expected to cut its base rate close to 3.5% before the end of 2025. However, Andrew Bailey, the Bank’s governor, has said that it will need to be careful not to reduce borrowing costs too quickly or by too much, amid concerns over lingering inflationary pressures.
The Guardian quoted Catherine Mann, a member of the Bank’s monetary policy committee, as saying the underlying price pressures in the economy remain strong and showed that the central bank needed to take a tough stance when it sets interest rates.
Mann, one of four policymakers who opposed this month’s cut in UK interest rates from 5.25% to 5%, said services inflation remains too high for comfort, and UK wages are rising faster than the Bank’s forecasts have predicted.
Headline inflation held steady at the Bank’s target of 2% in May and June but official figures released on Wednesday are expected to show inflation rose to 2.3% in July.
She said: “We shouldn’t be seduced by headline inflation,” explainin
g that falling energy and goods prices have brought average inflation down to 2%, but they remain volatile and can push it back up again.
Mann said that, while goods inflation has fallen, the cost of services was rising at more than 5% a year – which, she feels, is not compatible with keeping headline inflation sustainably at 2%.
Part of that process is “the desire to maintain certain wage relationships”, she said, hinting that a rise in the minimum wage of almost 10% in April has put pressure on companies to raise wages further up the pay scale.
She anticipated higher shipping and transportation costs would put pressure on the price of goods that are either produced in conflict zones or must travel through them.
Mann also said there would be more persistent inflation shocks across the world feeding into the cost of UK goods. A more volatile world would force central banks to keep interest rates higher for longer to avoid another rise in inflation wrecking household living standards.
Source: Qatar News
Agency