The current UK inflation rate has risen to 2.2% in the year to July. Now slightly above the Bank of England’s 2% target that has been held for the previous 2 months, it is the first increase seen this year.
Why has the current UK inflation rate increased?
The main reason for the increase in inflation is that gas and electricity prices fell by less than they did in July 2023. An increase to 2.3% had actually been anticipated by economists and lower hotel prices helped to offset this.
The rise to 2.2% means that prices are increasing faster than they were for the last 2 months. So, with the base rate having been reduced to 5% in August, what does this now mean for interest rates in the near future?
How will this increase affect interest rates?
The Bank of England has stated that it expects inflation to increase further – reaching 2.75% – before falling again. Although the rate has just risen to 2.2%, the fact that the increase is lower than anticipated shows that the measures taken to get it back under control are working. Inflation pressures are less than they have been in recent times.
Core inflation dropped from 3.5% to 3.3% in the year to July. Services inflation, which remained unchanged at 5.7% in June, has also dropped to 5.2%.
The next inflation figures are to be released a day ahead of the Monetary Policy Committee’s review of the base rate in September. Currently, the Monetary Policy Committee is still expected to hold the base rate at 5% following the review. However, these positive inflation figures have caused some economists to change their minds. They believe that a cut to 4.75% can now be anticipated.
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