The chances of an interest rate cut in August were hit after progress on tackling inflation stalled last month due to rising hotel prices that some analysts blame on the “Taylor Swift effect”.
The government’s preferred cost-of-living gauge remained at its 2% target for the second consecutive month in June.
The Office for National Statistics (ONS) said clothing prices fell sharply as retailers tried to clear summer stock, but this was offset by higher hotel prices.
Other key price measures also showed no improvement in June. Core inflation, which excludes prices of food, energy, alcoholic drinks and tobacco, remained unchanged at 3.5%. Inflation in the Bank of England’s closely watched services sector remained stable at 5.7%.
Hotel rates rose 8.8% in June compared to a year earlier, but that was still down from a 1.7% increase in the same period in 2018. Analysts said the increase was partly due to demand for accommodation around the eight UK dates of Taylor Swift’s “Eras” world tour.
Paul Dales of Capital Economics said: “CPI inflation in June was exactly in line with the 2.0% target, but the fact that services inflation remained stable at 5.7% is a blow, and only a small part of this appears to have been due to the temporary impact of the Taylor Swift concert. As a result, the chances of an August rate cut are now slightly reduced further.”
The June inflation figure will be the last data before the Bank of England decides whether to cut interest rates (currently at 5.25%) for the first time in a year on August 1. Financial markets lowered their forecasts for a likely August rate cut from 50% to 35% following the release of the Bank of England data on Wednesday.
Luke Bartholomew, deputy chief economist at fund manager abrdn, said: “Today’s inflation report will set a tough spot for the Bank of England’s August interest rate decision. The strength of hotel price increases suggests a Taylor Swift effect on prices, but policymakers will almost certainly ignore these developments.”
Financial markets had generally expected inflation, as measured by the Consumer Price Index (CPI), to fall to 1.9% last month, but the ONS said it was still at its lowest level in nearly three years. The previous lower annual rate of increase in the cost of living was 1.5% in April 2021.
Overall prices rose 0.1% last month, matching the increase for the same month in 2023. Food price inflation continued to ease, falling to 1.5% from 1.7%, while clothing and footwear prices rose 1.6% in the year to June after rising 3% in the year to May. Hotel and restaurant inflation rose to 6.3% from 5.8%.
Interest rate setters on Threadneedle Street’s nine-member Monetary Policy Committee expect inflation to rise to 2.5%. Latter half It is expected to fall below the official 2% target by 2024.
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“Hotel prices have risen significantly, while used car prices have fallen, although the fall was less than at this time last year, but this was offset by lower prices for clothing due to widespread sales,” ONS chief economist Grant Pfitzner said.
Treasury Secretary Darren Jones said: “I’m pleased that inflation is reaching our target, but I know prices remain high for families across the UK. We face a legacy of 14 years of chaos and economic irresponsibility. That’s why the Government is now taking tough decisions to repair the foundations, rebuild Britain and make every part of the UK better.”
George Dibb, deputy director of economic policy at left-leaning think tank IPPR, said: “Today’s data confirms that inflation is on track to normalise. Although some inflationary drivers, such as core inflation, remain elevated, the Bank of England’s policy stance remains too tight. Interest rates have been too high for too long and they need to be lowered to avoid stifling growth.”
