Inflation climbs above Bank of England target to 2.2%

Inflation has risen back above the Bank of England’s 2% target, in the first increase of 2024 after months of steady declines.

The Office for National Statistics (ONS) said Consumer Prices Index (CPI) inflation rose to 2.2% in July, up from 2% in June.

It represents the first time inflation has climbed since December, driven partly by a sharp drop in energy bills last July falling out of the annual calculations.

The Bank of England said on 1 August that the fall-away of energy bills in the wider inflation figures would show "more clearly the prevailing persistence of domestic inflationary pressures".

The latest figures mean that prices are rising faster across the country than in previous months, but still at a slower rate than in 2022 and 2023 when households and businesses were being squeezed during the peak of the cost-of-living crisis.

The data comes after the Bank of England’s Monetary Policy Committee voted to cut interest rates to 5% earlier in August, a quarter-point reduction.

The headline inflation figure of 2.2% is lower than the 2.3% that most City economists were expecting, and undershoots the Bank’s own forecast.

However, the rise in inflation could still set the tone for the MPC’s policy at its next decision in September, where most economists predict they will hold rates and wait until November before cutting borrowing costs again.

Officials expect inflation will continue to nudge up for the rest of 2024 before falling gradually again.

The closely watched annual rate of CPI services price inflation fell to 5.2% in July, down from 5.7% in June, its lowest rate since June 2022.

Experts have warned that persistently high services price inflation could risk pushing the overall inflation data up further, but the drop could provide some encouragement to policymakers.

The annual Retail Prices Index (RPI) inflation rate was 3.6%.

Darren Jones, Chief Secretary to the Treasury, said the figures show many families are "still struggling with the cost of living".

Meanwhile, Ed Monk, Associate Director for Personal Investing at Fidelity International, said the decrease in core figures suggests the "trajectory for price rises is still downwards".

It comes after the ONS revealed on Tuesday that wage growth, another key driver of headline inflation, was 5.4% year-on-year over the three months to June, down from 5.7% in the previous three months.

Martin Sartorius, Principal Economist at the Confederation of British Industry (CBI), said: "Inflation undershooting the Bank of England’s expectations will be seen as a positive sign that price pressures are continuing to normalise for households and businesses.

"Today’s data will give the Bank’s Monetary Policy Committee some measure of confidence that domestic price pressures are less likely to derail a sustainable return to the 2% target.

"A second consecutive cut in interest rates next month is not a certainty, however. This is because the MPC will still be mindful of upside risks to the inflation outlook, especially as pay growth remains stubbornly high."

Sarah Coles, Head of Personal Finance at Hargreaves Lansdown, added that the inflation rise is "not massively welcome, especially for people hoping to be able to enjoy the new space in their budgets created by wage rises, but it’s not a huge upset either".

"It’s likely to be business as usual at the Bank of England in September, with rates on hold, so it’s unlikely to alter the picture significantly for savers and borrowers," she said.