Chances of an interest rate cut in August took a hit after higher hotel prices – blamed by some analysts on the “Taylor Swift effect” – meant progress in the UK’s fight against inflation stalled last month.
The government’s preferred cost-of-living measure remained at its 2% target for the second straight month in June.
A sharp fall in clothing prices as retailers scrambled to offload summer stock was offset by rising hotel costs, the Office for National Statistics (ONS) said.
Other key price indicators also showed no improvement in June. Core inflation – which excludes food, energy, alcoholic beverages and tobacco – was unchanged at 3.5%. Inflation in the services sector – closely watched by the Bank of England – remained steady at 5.7%.
Hotel prices rose by an annualized 8.8% in June, compared with a much smaller increase of 1.7% a year earlier. Analysts suggested the jump was partly due to demand for stays around the eight UK dates of Taylor Swift’s Eras global tour over the course of the month.
Paul Dales of Capital Economics said: “While CPI inflation remained firmly in line with the 2.0% target in June… it is the stability of services inflation at 5.7% that is a blow. And it looks like only a small part of that may have been due to the temporary effects of Taylor Swift’s concerts. As a result, the chances of a rate cut in August have narrowed even further.
Inflation data for June will be the last before the Bank of England decides on August 1 whether to cut interest rates – which are at 5.25% – for the first time in a year. Financial markets revised their forecasts of the likelihood of an August cut from 50% to a 35% chance on Wednesday after the ONS data was released.
Luke Bartholomew, deputy chief economist at fund manager abrdn, said: “Today’s inflation report will keep the Bank of England’s August rate decision on a knife edge. The strength of hotel price growth suggests a Taylor Swift effect on prices, but policymakers will almost certainly overlook this kind of dynamic.”
Although financial markets agreed last month it fell to 1.9%, as measured by the consumer price index (CPI), the ONS said inflation was still at a joint lowest level in almost three years. The year-on-year increase in the cost of living was last lower in April 2021, when it was 1.5%.
Prices rose 0.1% overall last month, matching the increase in the same month in 2023. Food price inflation continued to moderate, falling from 1.7% to 1.5%, while clothing and footwear prices rose 1. 6% compared with 3% in the year to May. Hotel and restaurant inflation rose from 5.8% to 6.3%.
Threadneedle Street ratemakers at its nine-member monetary policy committee expect inflation to rise to 2.5% in the second half of 2024 before falling back below the official 2% target.
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ONS chief economist Grant Fitzner said: “Hotel prices have risen significantly, while the cost of used cars has fallen, but less than this time last year. However, these were offset by falling clothing prices, with extensive sales reducing their price.”
Darren Jones, Chief Secretary to the Treasury, said: “It is welcome that inflation is on target, but we know that prices remain high for families across Britain. We face a legacy of 14 years of chaos and economic irresponsibility. That is why this Government is now taking the hard decisions to fix the foundations so that we can rebuild Britain and improve the situation in every part of Britain.
George Dibb, deputy director of economic policy at the left-wing think tank IPPR, said: “Today’s data confirms that inflation is well on its way to normalisation. Some drivers of inflation, such as core inflation, are still elevated, but Bank of England policy remains too tight. Interest rates have been too high for too long and need to be lowered so they don’t stifle growth.”