UK inflation holds steady at 2.2% in August

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UK inflation held steady at 2.2 per cent in August, leaving the door open for the Bank of England to cut interest rates later this year.

The annual increase in consumer prices, reported by the Office for National Statistics on Wednesday, was unchanged from July’s rate and matched the expectations of economists polled by Reuters. 

The figures come as the BoE’s Monetary Policy Committee will announce its latest rate decision on Thursday after cutting the rate by quarter point to 5 per cent in August in the first reduction in more than four years.

Services inflation, the BoE’s key measure of domestic price pressures, rose to 5.6 per cent, marginally above economists’ expectations of 5.5 per cent and up from 5.2 per cent in July.

Economists said persistent price pressures in the services sector mean the MPC will leave rates unchanged this week, but further cuts are expected later this year.

“A pause on interest rate cuts was already expected tomorrow and today’s release cements that view,” said Ruth Gregory at Capital Economics. “We continue to assume the next [quarter] point rate interest rate cut will take place in November.”

Traders scaled back bets on the possibility of the MPC cutting the rate on Thursday to about 25 per cent, from 35 per cent ahead of the release of the inflation figures. Sterling edged higher to 0.13 per cent to $1.3178.

The BoE has been wary of declaring victory prematurely over inflation, which has been slightly above the BoE’s 2 per cent target for two consecutive months.

Services inflation was held up by a sharp increase in airfares, figures from the ONS showed, offset by weakness in fuel prices, as well as charges by restaurants and hotels.

Core inflation, which strips out volatile food and energy prices, was 3.6 per cent in August compared with 3.3 per cent in July.

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”.