UK inflation rate holds steady at 2.2% ahead of interest rate decision

Inflation remained above the Bank of England’s (BoE) 2% target last month, official figures show, as rate setters prepare to announce the next decision on interest rates.

The Consumer Prices Index (CPI), which tracks cost changes across the economy, rose by 2.2% in the year to August, according to data from the Office for National Statistics.

Core CPI, which excludes energy, food, alcohol and tobacco, rose by 3.6% in the 12 months to August 2024, up from 3.3% in July. Economists had expected a smaller rise in core inflation, to 3.5%.

Services inflation rose by 5.6% in August, in line with economists' expectations, compared with 5.2% in July amid possible impact from Taylor Swift’s UK tour. This measure is closely watched by the Bank rate setters.

Inflation has been slightly above the BoE’s 2% target for two consecutive months. The announcement comes a day before the Bank of England's Monetary Policy Committee (MPC) makes its interest rate decision.

Yael Selfin, chief economist at KPMG UK, said: “Strong services sector inflation likely closes the door on interest rate cut tomorrow.”

Money markets indicate there is only a 14% chance that the MPC will reduce borrowing costs, down from 25% before the inflation figures were released.

Grant Fitzner, chief economist at the ONS, said: “Inflation held steady in August as various price fluctuations offset each other.

“The main movements came from air fares, in particular to European destinations, which showed a large monthly rise, following a fall this time last year.

Read more: Bank of England expected to hold interest rates as investors await November cut

“This was offset by lower prices at the pump as well as falling costs at restaurants and hotels.

“Also, the prices of shop-bought alcohol fell slightly this month, but rose at the same time last year.

“Following two months of growth, raw material prices fell, driven by lower crude oil prices, while the increase in the cost of goods leaving factories slowed again.”

Air fares rose at the second-fastest pace since records began in 2001, in a blow to families during the school summer holidays.

The cost of air travel jumped by by 22.2% between July and August, ONS data showed. On the other hand, motor fuel prices fell by 3.4% in the year to August, compared with a rise of 1.8% in the year to July.

According to the ONS, the average price of petrol fell by 2.1p per litre between July and August to 142.3p per litre. That’s down from 148.5p per litre in August 2023.

Read more: What we're expecting to see in the autumn budget

Diesel prices fell by 2.6p per litre to 147.8p per litre, down from 151.1p per litre in August 2023.

Cheaper oil prices also meant the cost of raw materials was down, which caused the cost of goods leaving factories to slow.

Darren Jones, chief secretary to the Treasury, said: “Years of sky-high inflation have taken their toll; and prices are still much higher than four years ago.

“So, while more manageable inflation is welcome, we know that millions of families across Britain are struggling, which is why we are determined to fix the foundations of our economy so we can rebuild Britain and make every part of the country better-off.”

Richard Carter, head of fixed interest research at Quilter Cheviot, said the rise in core inflation gives the BoE food for thought.

"Today’s inflation figures for August, which shows CPI has remained at 2.2% will likely bolster predictions that the Bank of England will hold rates as it prepares for its upcoming policy decision this week.

"The inflation data, which follows July's rate of 2.2% will unlikely cause the BoE to want to diverge from its current plans especially given core inflation rose by 3.6% in the 12 months to August, up from 3.3% in July," he said.

He added: "However, the US Federal Reserve, which is expected to deliver a potentially larger-than-anticipated rate cut this week, may play a part in fuelling speculation about the speed of further monetary easing across the world."

Sandra Horsfield, an economist at Investec, said: "The jump and then fall in hotel price inflation in June and July this year was indeed linked to temporary extra demand for accommodation for the first UK leg of Taylor Swift's Eras tour, the second leg of that tour falling into August could have boosted hotel and thereby services price inflation once more."

Read more: US Federal Reserve expected to cut and Bank of England set to hold interest rates

For mortgage holders, steady inflation means their money can stretch a bit further, Alice Haine, personal finance expert at Bestinvest, said.

“For homeowners and first-time buyers, stable inflation combined with slightly more competitive mortgage rates means affordability levels are improving for those shopping around for a new home as their money can stretch that little bit further," she said.

“Those pinning their hopes on a second rate reduction to ease their borrowing woes are likely to take some comfort from the number of major lenders already rolling out mortgage rate cuts. The number of sub 4% fixed rate deals available is on the rise, with some lenders even extending this to two-year fixes, as competition heats up. A surprise interest rate reduction tomorrow could catalyse the mortgage market even further with rates falling at an even faster pace."

Download the Yahoo Finance app, available for Apple and Android.