Inflation in the UK remained steady at 2.2% in the year leading to August, despite a sharp increase in flight costs, according to the Office for National Statistics (ONS). The rise in airfares, particularly for European destinations, was offset by falling fuel prices and slower price increases in restaurants.
The Bank of England is expected to keep interest rates unchanged at 5% in its meeting on Thursday, even as inflation remains slightly above its 2% target. The current inflation rate is considerably lower than during the peak of the cost of living crisis in 2022.
Grant Fitzner, ONS Chief Economist, highlighted that while airfares surged 22% from July to August, the second-largest increase since 2001, price drops at the fuel pump and slower growth in restaurant and hotel costs helped stabilize inflation. Prices for shop-bought alcohol also fell slightly, contributing to the overall balance.
However, private rents saw an 8.4% rise over the year to August, putting additional pressure on UK households. Despite this, house prices aligned with general inflation, increasing by 2.2% over the 12 months to July.
The hospitality industry continues to face challenges. Natalie Jenkins, owner of Moreish restaurant in Shrewsbury, expressed concern about the ongoing impact of higher prices on consumer behavior. “I think it’s a painful, painful road ahead,” Jenkins said, noting customers are cutting back on small indulgences like a second cup of coffee or dining out.
In contrast, financial analyst Danni Hewson of AJ Bell is optimistic, stating, “For the consumer, it is an improving picture, especially when it comes to filling up cars or kitchen cupboards.” However, Hewson warned that the strain of rising everyday costs could become more pronounced as colder months set in, and heating bills rise.
The Bank of England anticipates inflation may tick up again in the latter half of the year due to expected increases in household energy bills. However, these rises are not expected to match the sharp price hikes seen in 2022 and 2023, which drove the Bank to raise interest rates.
While economists predict the Bank will maintain its interest rate at Thursday’s meeting, there is speculation that a rate cut may occur at the next meeting in November. Yael Selfin, Chief Economist at KPMG UK, commented that while headline inflation may rise temporarily, the Bank of England is likely to focus on more persistent factors like services inflation.
With inflation pressures easing in some sectors, the UK economy continues to navigate the complex dynamics of rising costs and stagnant wages, keeping the outlook uncertain for many households.