91探花

The steadiness in inflation at 2.2% is a good sign, but the rebound in services inflation in August to 5.6% makes an interest rate cut at tomorrow’s Monetary Policy Committee (MPC) meeting even less likely. This is just a bump in an otherwise downward path, though. Services inflation should continue to slow over the rest of the year, leaving the door wide open for one, or even two more cuts towards the end of the year.

Key drivers 

Steady headline inflation at 2.2% leaves it 0.2 percentage points (ppts) below the last MPC forecast and even though services inflation rebounded to 5.6%, it is also still 0.2 ppts below the forecast. The rebound in services inflation was primarily driven by a jump in airfare inflation - 10.4% to 11.9% - but this has much more to do with the date the Office for National Statistics (ONS) collects prices than what’s happening with underlying price pressures. There was also a big jump in cultural inflation from 6% to 7.8%, likely reflecting base effects and the impact of the Taylor Swift Eras tour.

The good news is that accommodation inflation fell again from 3.9% to 3.7% and restaurant inflation dropped from 5.5% to 4.9%. Price pressures in this sector had been very sticky until July, so consecutive drops in inflation suggests that price pressures are now actually easing.

Elsewhere, almost all goods prices continued to decline, with goods inflation in aggregate dropping by 0.9%, which helped to offset the impact of higher services inflation. Food price inflation dropped a touch to 1.3% from 1.4%. We continue to think the disinflationary impulse from the category has all but run its course.

What next? 

We expect inflation to drop back to 2.1% in September as a strong September 2023 services price gain depresses the year-over-year inflation rate this year and airfares unwind some of their August gain. Further ahead, inflation will rise to a little below 3% by the end of the year due to higher energy prices. But services inflation should continue to slow, offsetting some of the impact of higher energy prices. 

The policy takeaway 

Overall, we’re not worried about the rebound in services inflation as it was driven by erratic airfares. Most other sectors show that price pressures are continuing to ease. While there is little chance that the MPC will cut interest rates tomorrow, we think the chances are rising of getting two cuts towards the end of the year.  
Indeed, the risks are tilted toward a swifter easing cycle if services inflation continues to undershoot the Bank of England’s (BoE) forecast. That would likely prompt a reappraisal of the risks from inflation persistence and embolden policymakers.

The BoE isn’t immune to global forces either. If the Federal Reserve signals concern about the outlook and eases aggressively, it’s possible the BoE moves more quickly than we expect to insure against the risk of a deterioration in global growth. It took a similar approach in 2001 when the US outlook soured.

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