Why isn’t inflation falling in the UK? Taylor Swift is to blame…

The core CPI, which excludes more volatile energy and food prices, was expected to fall to 3.4 percent in June, but was unchanged from May at 3.5 percent.

Policymakers are more concerned about the core CPI because it is falling more slowly than the headline inflation rate and also higher than this measure.

Inflation in the services sector is also a concern for the BoE, which was at 5.7% last month. The lack of movement in both core and services figures makes an August 1 rate cut less likely, economists say. This is a change from the last inflation reading in the UK, when headline CPI hit target and financial markets increased the likelihood of a rate cut in August, futures trading shows.

However, Michael Field, European market strategist at Morningstar, says the situation is not dangerous.

“Inflation in the UK rose by 2% in June compared to a year earlier. That’s a slight increase on the previous month, but nothing to be alarmed about,” he says.

“This level is exactly in line with the Bank of England’s 2% target interest rate and increases pressure on central bankers to cut the base rate at next month’s meeting.

“However, it can be countered that the unemployment rate in the UK, which is certainly low by historical standards, has now reached 4.4%, having reached its lowest point of 3.6% just two years ago.

“Over time, savings in input costs should also lead to lower service costs, so with any luck, service inflation should also decline.”

When will the Bank of England cut interest rates?

Economists point to some one-off factors in June that impacted consumer prices.

Firstly, Taylor Swift’s blockbuster Eras The tour is likely to have pushed up hotel and restaurant prices, particularly in London, while a summer of football has led to higher spending on alcohol and fast food. Services in general have seen higher demand and higher prices, including holidays, cinema, theatre, concerts and hairdressers. This trend has been noticeable since the end of the pandemic, as Britons prioritise experiences despite the cost of living.

At the same time, unseasonably humid weather forced clothing retailers to reduce summer clothing prices last month, leading to a decline in the clothing share of the consumer price index. Food prices rose year-on-year, but to a much more moderate extent.

Payroll and employment data due tomorrow (July 18) are also likely to suggest to the BoE that inflationary pressures are still present in the economy. Julian Howard, chief multi-asset investment strategist at GAM Investments, believes the forecast of a rate cut in the summer may have gone off track.

“This latest inflation index is unlikely to be as helpful to the BoE as many would have expected,” he says.

“Headline inflation is at – but not below – target and is clearly vulnerable to rising above target again in the coming months. For both the Federal Reserve and the BoE, the current inflation trajectory is simply no longer the clear signal for action that it once was.”

When will the Bank of England cut interest rates?

At the last meeting of the Bank of England, seven MPC members voted to maintain the current rate and two voted to reduce it. Those in favour of maintaining the current rate wanted to see “more evidence of declining inflation resilience (…) before reducing the restrictive monetary policy”. The Bank itself is forecasting a rise in the consumer price index (CPI) to 2.5% towards the end of the year.

The lack of change in the consumer price index figure does not suggest that the economy as a whole has changed since the last inflation figures were published on June 19. On July 5, a new British government took power after 14 years of Conservative rule.

With its overwhelming majority, the new Starmer government has a broad mandate to implement a range of new fiscal measures. GDP for May was stronger than expected at 0.9% and the pound has strengthened against major currencies, helped by the end of political uncertainty. Whether this trend will continue remains to be seen.