UK inflation rises to highest since early 2024 at 3.8%

By William Schomberg and David Milliken

LONDON (Reuters) -British inflation hit its highest in 18 months in July when it increased to 3.8% from 3.6%, official data showed on Wednesday, once again leaving the country with the fastest rate of price increases among the world's largest rich economies.

Inflation in Britain's services sector - which is watched closely by the Bank of England - accelerated to 5.0% from 4.7% a month earlier.

The BoE expected headline inflation to rise to 3.8% in July but had forecast a smaller 4.9% rise in services prices. Economists polled by Reuters had mostly expected increases of 3.7% and 4.8% respectively.

The BoE cut interest rates this month but only after a narrow 5-4 vote by policymakers and it suggested it would slow the already gradual pace of lowering borrowing costs due to inflation's persistence.

Sterling rose slightly after the data was published and investors expected a longer wait before the next BoE rate cut.

A quarter-point cut is not fully priced in until March 2026. Earlier this month, the next rate cut was viewed as highly likely before the end of 2025.

"The economy is experiencing a bout of high inflation and weak growth that will likely remain until next spring," said Deloitte Chief Economist Ian Stewart. He said it was unclear whether the BoE would cut rates again in 2025.

The BoE thinks British inflation will hit 4% in September, double its target, and stay above 2% until mid-2027.

Inflation the United States held at 2.7% in July and in the euro zone it is expected to remain around the European Central Bank's 2% target over the coming years.

Some of the difference reflects how energy and other utility prices are regulated in Britain. Big increases in utility bills in April have boosted year-on-year inflation comparisons.    

Britain's relatively tight labour market, which economists say has become more rigid since Brexit, is also putting upward pressure on prices. Wage growth in Britain has slowed but at about 5% it is too high for the BoE to feel comfortable about inflation returning rapidly to 2%.

Furthermore, employers say that a tax increase imposed on them in April by finance minister Rachel Reeves and a big jump in the minimum wage are forcing them to put up prices. 

HIGHER AIRFARES

Wednesday's data showed the biggest contributor to July's rise in inflation came from transport costs, particularly air fares - a component that BoE policymakers sometimes disregard because of its volatility.

Electricity prices, petrol, soft drinks and hotel rooms also pushed up the annual rate of inflation between June and July.

The ONS said it saw no evidence that a tour by rock band Oasis pushed up hotel costs. Previous tours by performers such as Taylor Swift nudged up inflation, some economists have said.

Food and non-alcoholic drink prices - big influences on how the public thinks about inflation - were 4.9% higher than a year earlier, the biggest rise since February 2024. The BoE forecasts food inflation will peak at 5.5% at the end of the year.

ONS data last week painted a picture of an economy with enough momentum to keep inflation high. Output grew by more than expected in the second quarter and the labour market, while still losing jobs, showed signs of stabilisation.

Data published earlier on Wednesday showed basic pay settlements by British private-sector employers held at 3% in the three months to July for the eighth monthly report in a row by data firm Brightmine.

The ONS, which has received criticism for problems with its data, said it had identified a "minor error" in the imputation of missing data for seasonal items but it had no impact on headline CPI.

(Writing by William Schomberg; Editing by Toby Chopra, Emelia Sithole-Matarise and Sharon Singleton)