UK Inflation’s Sticky Hold: Why a November Rate Cut is Still on the Table
Despite remaining stubbornly at 3.8% in July, UK inflation isn’t necessarily derailing expectations of a potential rate cut before the year’s end. While the latest figures aren’t welcome news for the Bank of England (BoE) ahead of Thursday’s policy meeting – where rates are widely expected to hold – a deeper dive reveals nuances that suggest the door to easing monetary policy remains ajar. The critical question now isn’t if rates will fall, but when, and increasingly, November is looking like the pivotal moment.
The Food Price Puzzle and Climate Change’s Impact
A significant driver of continued inflationary pressure is the escalating cost of food, now rising at a rate of 5.1% – the fastest pace since January. This is a particular concern for the BoE, as food prices heavily influence inflation expectations. However, this isn’t simply a matter of supply and demand; a growing body of evidence points to the undeniable impact of climate change. The UK experienced its hottest spring and summer on record, devastating harvests and driving up prices for domestically grown produce like beef, milk, and vegetables. This effect extends beyond British borders, impacting global commodities like chocolate and coffee, as extreme weather patterns disrupt supply chains worldwide.
As Tom Lancasterland, a food and farming analyst at the Energy and Climate Intelligence Unit, explains, central banks are increasingly recognizing that climate-related food price shocks are largely beyond their control. Traditional monetary policy tools are ineffective against systemic risks stemming from a changing climate. The long-term solution, therefore, lies in aggressive emissions reductions and climate adaptation strategies.
Services Inflation: The Key to Unlocking Rate Cuts
While food inflation grabs headlines, the BoE is laser-focused on services inflation, which currently stands at 4.7% (though the core services basket remains at 4.2%). This segment, representing the underlying health of the UK economy, is where economists see the most potential for downward movement. A significant portion of this – 40% – is tied to the hospitality sector, which has been grappling with the effects of April’s payroll tax and National Living Wage increases.
However, there’s reason for optimism. Easing rental growth is expected to contribute significantly to disinflation in the service sector over the coming months. Furthermore, the volatility of airfares, which temporarily masked underlying trends, is beginning to subside. ING economists believe that if these trends continue, a November rate cut becomes increasingly likely.
The Impact of the Autumn Budget
Adding further weight to the case for a rate cut is the anticipated autumn Budget, widely expected to be dominated by tax rises. This fiscal tightening could provide the BoE with the space to loosen monetary policy, potentially leading to two or three rate cuts by next summer. Deutsche Bank’s Sanjay Raja notes that while August inflation data offered some correction from previous surprises, the peak remains elusive, and the MPC will likely seek further evidence of a sustained downtrend before acting.
Navigating a Complex Economic Landscape
The current economic climate is a complex interplay of factors. While global events, like the US Federal Reserve’s expected rate cut, influence the UK’s monetary policy, domestic pressures – particularly around wages and services inflation – are paramount. The BoE faces a delicate balancing act: curbing inflation without stifling economic growth. The recent data suggests that a cautious approach is warranted, but the potential for rate cuts remains firmly on the horizon.
The persistence of “sticky” inflation, as highlighted in recent reports, underscores the challenges facing policymakers. It’s no longer simply about headline figures; it’s about understanding the underlying drivers and anticipating future shocks – including those stemming from an increasingly unpredictable climate.
What are your predictions for the Bank of England’s next move? Share your thoughts in the comments below!
