"Core inflation continues to fall steadily and is now at its lowest level since September 2021. It's this number which is key to the long term outlook for the UK and which will drive Bank of England interest rate decisions."
- Nicholas Hyett, investment manager at Wealth Club
UK CPI inflation has risen from 2% in June to 2.2% in July, the first rise this year but below economists' forecasts of 2.3%.
Despite the rise, all key measures - including headline and services inflation - rose less than anticipated by markets.
Core inflation came in at 3.3% in the 12 months to July, down from the 3.5% in June. Core inflation continues to fall steadily and is now at its lowest level since September 2021.
While industry experts say a September rate cut may now be off the cards, they noted that the Bank of England had already priced in a rise in inflation, and predict that we may still see a further rate reduction this year.
Nicholas Hyett, investment manager at Wealth Club, said: "Economists had expected a bit of an inflationary heatwave over the summer, as the effects of lower food and energy prices started to drop out of the numbers and core inflation continued to run hot.
"In the event, the inflationary heat has picked up a bit, but not quite to the degree that had been feared.
"Crucially core inflation continues to fall steadily and is now at its lowest level since September 2021. It's this number which is key to the long term outlook for the UK and which will drive Bank of England interest rate decisions. All economies are buffeted by global commodity prices, it's domestically generated inflation that policy makers focus on.
"Services inflation remains higher than you might like, at 5.2%, although did fall thanks mainly to a substantial fall in hotel costs year-on-year. As a labour intensive industry, hotel prices can be a bit of a bellwether for the wider labour market - so softness here, coming after lower wage growth yesterday, will be reassuring. The Bank is probably feeling pretty pleased about the timing of its first rate cut at the moment."
Debapratim De, director of economic research at Deloitte, commented: “Headline inflation has risen in July but remains in line with the Bank of England's latest projections. We expect it to rise further, approaching 3% by the end of this year despite a slight easing in underlying price pressures, as earlier declines in energy prices fall out of calculations.
“Today's rise in inflation is unlikely to materially alter the Bank's thinking on interest rates, especially as the latest wage data points to a further cooling in the labour market. We expect rates to be kept on hold in September, but two further cuts remain likely this year.”
Ed Monk, associate director for personal investing at Fidelity International, said: “A rise in the headline rate of inflation today is less important than a slight easing in core inflation - down from 3.5% to 3.3% - which suggests the trajectory for price rises is still downwards. Easing wage rises reported yesterday point to a similar trend and suggest we remain on track for further cuts to interest rates in the months ahead."
Luke Bartholomew, dputy chief economist at abrdn, added: "Despite the pick-up in headline inflation, this report represents welcome news for the Bank of England. The move back above the 2% target was always likely given energy base effects, and in fact the rise was slightly smaller than expected. More importantly, measures of underlying inflation pressure look to be softening, with services inflation in particular coming in well below expectations. This should help reassure some policymakers that inflation pressures are proving slightly less persistent than feared. After yesterday’s solid labour market report, the Bank will not be in any hurry to cut rates again immediately, but the ongoing slowing in inflation pressure means there is certainly scope for at least one more rate cut this year.”
