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Overall inflation slows, but can't stop the Bank of England from hiking rates.
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IntroductionOn Wednesday, the latest data released by the Office for National Statistics showed that the UK' ...
On Wednesday,Which foreign exchange platform is the safest the latest data released by the Office for National Statistics showed that the UK's Consumer Price Index (CPI) for July dropped from 7.9% in June to 6.8%, marking a significant decrease. This reduction in CPI is welcome news for millions of financially pressed Britons. However, the core inflation rate, excluding energy, food, alcoholic beverages, and tobacco, saw a year-over-year increase.
Food prices in July only increased by 0.1%, not only the lowest growth rate since September of last year but also far below the historical peak of 17.4% set in March 2023. The prices for whole milk and low-fat milk decreased by nearly 6% and 3.2%, respectively. The annual growth rate for bread and cereals reduced from 16.7% in June to 14.4%.
The summertime surge in hotel and passenger travel offset the impact of the decline in energy prices. Matthew Corder, Deputy Director of Price Statistics at the National Statistics Office, stated that despite the persistent high inflationary pressures and food prices, the decrease in energy costs and food prices has significantly slowed the overall inflation rate in the UK for two consecutive months.
Although the latest data indicates a rapid decrease in inflationary pressures, the Bank of England may still opt to raise interest rates further in its mid-September meeting due to record wage growth. David Henry, an investment manager at Quilter Cheviot, said that while the substantial drop in inflation data signals a reduction in the cost-of-living pressures faced by residents, additional rate hikes might be necessary to achieve further reductions in inflation due to unexpectedly high income growth and a stable economic outlook.
However, the divergent performances of wages and inflation pose a tricky problem for the Bank of England. Despite repeated rate hikes, the overall level of inflation is still far from the Bank's 2% target. The latest data showing unexpectedly accelerated wage growth supports inflation expectations and potential inflationary pressures.
Considering the economic impact of further interest rate hikes or keeping interest rates high for an extended period, the Bank of England also needs to balance controlling inflation with maintaining economic growth. Russ Mould, the investment director at AJ Bell, warns that unexpectedly fast wage growth indicates that inflation is becoming increasingly entrenched in the UK economy. An increase in unemployment and a decrease in job vacancies might suggest a cooling down of the UK job market.
Mould said that whether it's the ongoing high inflationary pressure, unexpectedly accelerated wage growth, or signs of a cooling job market, these factors considerably increase the complexity of the Bank of England's monetary policy. Deciding whether to maintain a restraining monetary policy on inflation or shift towards supporting economic growth presents the Bank of England with a difficult dilemma.
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