Inflation steady – but chances of another rate cut are slim

Let’s start with the good news: August’s inflation number came in unchanged at 2.2 per cent. While that is higher than the Bank of England’s 2 per cent target, it is in line with City forecasts and beneath the 2.4 per cent the Bank itself had predicted at this stage. Compared to the double-figure price rises Britain was experiencing in the painful summer of 2023, it looks very good.

Food prices, a persistent bugbear, rose by just 1.3 per cent – down from 1.5 per cent. At the factory gate, an increase of just 0.2 per cent was recorded while the cost of raw materials actually fell, as did that of fuel.

There are a few buts coming. One thing to watch is the cost of services – from haircuts to handymen and everything in between; service prices rose by a headline rate of 5.6 per cent compared with this time last year, quite a bit worse than the previous month (5.2 per cent). The City had pencilled in 5.5 per cent.

The real villain of the piece was aviation. Air fares traditionally rise in summer, but they rose by an extraordinary 22 per cent between July and August alone. Falling restaurant and hotel bills helped offset that to some degree.

The Bank of England’s rate-setting Monetary Policy Committee has long been concerned about the cost of services, which represent by far the biggest part of the UK economy. This price tends to be closely linked to the cost of paying the staff who provide them. Wage settlements have been declining, to a two-year low 5.1 per cent in the three months to July compared with 5.4 per cent in the three months to May. But the price consumers pay for services still represents an inflationary troll lurking under the bridge.

Core inflation – a measure of the underlying price pressures in the UK economy that excludes volatile components such as food, booze, fuel and tobacco – also rose to 3.6 per cent on the year compared to 3.3 per cent in July. This has been on a downward track, and while a modest jump may have been expected, it still represents a disappointment.

Remember, all these rises are cumulative. Food prices may have seen a modest increase, but a rise is still a rise – and it comes on top of the double-digit horror already locked into the cost of everyone’s weekly shop.

The net result of all this is that the Bank of England will almost certainly sit on its hands in Thursday’s decision. There will be no knife-edge poll like the 5-4 in favour of a historic cut last time. External appointee Swati Dhingra, the homeowners’ champion as the most dovish member of the MPC, will, I suspect, vote again to cut. Will she be joined by anyone? Perhaps Dave Ramadan, one of the Bank’s deputy governors, who joined her in voting for a cut before any of his colleagues.

The crumb of comfort for hard-pressed borrowers is that there will be ample scope for a cut in November if inflation remains below the Bank’s predicted path. “Overall we see the numbers today as presenting no obstacle to further rate cuts by the MPC in the future,” said broker Investec.

But as Brewin Dolphin’s chief strategist Guy Foster said, it is still by no means clear that inflation has been “decisively tamed”. Caution will be the MPC’s watchword.

The City still rates the chance of a cut at 25 per cent this time around; that looks optimistic to me. Standing still this time may prove to be the easiest decision the MPC has had to make for a while.