UK inflation rises less than expected in July

Inflation in Great Britain rose to 2.2% in July, up from the BoE’s 2% target for the previous two months, but came in below economists’ expectations. Services inflation, which is closely monitored by the Bank of England, decreased to 5.2% in July from 5.7% in June, falling short of the anticipated 5.5% increase.

The lower-than-expected July figures bolstered arguments for additional rate cuts, causing the British pound to drop by 0.35% against the US dollar in response to the data.

Earlier this month, the Bank of England reduced interest rates from a multi-year high of 5.25% and indicated that the 2% inflation readings from the past two months might be the lowest point. The BoE anticipates inflation will rise again, reaching around 2.7% by the end of the year.

Policymakers expect that the fading effects of the sharp decline in energy prices from 2023 will contribute to rising inflation in the coming months. They foresee consumer prices remaining elevated before returning to the 2% target in the first half of 2026.

The BoE will continue to monitor long-term inflationary pressures closely, including the ongoing impact of the protracted war in Ukraine and other factors such as wage growth, which remains nearly double the rate consistent with 2% inflation.