UK inflation took economists and market analysts by surprise with a jump in July, sparking fears of further rate rises. The Bank of England has been keen to play down the importance of this increase, pointing out that it is largely caused by volatility in airfares. The Federal Reserve still expects that these price hikes will not result in permanent inflationary pressure.
July was the start of inflation punching above expectations, largely on the back of a large increase in airfares. The Bank of England’s rate-setting monetary policy committee doesn’t expect this jump to stick. They chalk it up to the seasonal volatility of air travel prices that’s typical during summer months. The timing of this survey period – right when school holidays started kicking in – adds more context and exacerbates these airfare spikes.
Hotel prices remained relatively unchanged throughout July, despite the concurrent tour dates of popular bands like Oasis, which typically drive hospitality demand. This data on hotel prices contributes to an argument that inflation is not affecting every sector of the economy.
That said, looking forward, experts are predicting a dramatic deceleration in shelter inflation later this year. The current climate suggests that the era of social rents being regularly raised by extreme amounts is coming to an end – accelerating this expected slowdown. As rent costs continue to moderate, this trend should help to alleviate the broader inflationary crisis that households are confronting.
The Bank of England’s nine person monetary policy committee seems to be at odds over the direction of future monetary policy. Yet surprisingly, a majority of analysts still expect a rate cut in November to be more probable than not. The cooling jobs market is behind this expectation. It has experienced employment declines in eight of the past nine months. The writing is on the wall: job opportunities are drying up. This drop, in turn, puts downward pressure on wage growth, creating the possibility of a lower neutral interest rate.
Indeed, food prices continue to be the most important driver behind household inflation expectations. Supermarket prices and restaurant costs are only tangentially related. When food prices spike, they are quick to increase the overall inflation measures. We have an even bigger inflation breakout in the services sector. Inflation in the overall economy has skyrocketed to 4.9%, from just 2% at the end of last year. Nowhere has inflation hit harder than in the restaurant and café sector. They account for nearly 40% of the services inflation measure, after removing all the volatile or indexed out items.
While services inflation has increased recently, it’s now at 4.2%. This figure is a decrease compared to the much larger increase in the category overall. The Bank of England is closely monitoring these trends as they assess the economic landscape and determine future policy adjustments.