By Joshua Kirby


Inflation rebounded in the U.K. last month but a slowdown in the rate of services prices makes it likely that the Bank of England will move to lower its key interest rate again over the coming months.

Consumer prices were 2.2% higher than a year earlier in July, rising a little from June. But prices in the services sector eased to 5.2%; the rate of services inflation was last lower in May 2022. The BOE and many economists expect services prices, a key focus, to continue to slow, helping return inflation to the central bank's target toward the end of next year, and likely allowing the bank to continue with rate cuts.

The sharp fall in services inflation primes the BOE for a fresh cut to interest rates, on the heels of a first earlier this month, said Ruth Gregory, an economist at Capital Economics. "Interest rates will fall further and faster than markets expect," she said in a note to clients.

Economists polled by The Wall Street Journal had forecast the pickup in headline inflation, due largely to energy prices, which have been on a rollercoaster ride since Russia's invasion of Ukraine. Having driven a surge in inflation during 2022, energy prices cooled to lead a decline in inflation over the past 18 months. But with prices now steadying, and set to move higher, that drag on inflation has ended.

Core inflation, which strips out the effects of energy prices as well as those of food, stood at its lowest level since September 2021.

That should help convince the BOE that domestic trends are looking less liable to push inflation higher for longer, said Martin Sartorius, principal economist at business group the Confederation of British Industry.

"A second consecutive cut in interest rates next month is not a certainty, however," Sartorius said, pointing to continued pressure from wage rises in the U.K. Such pressures remain reason to stick to a tighter monetary policy, Catherine Mann, a member of the BOE's monetary-policy committee, told the Financial Times in an interview this week.

"It takes multiple years for wages to catch up to all these desired real wages that workers want to have," she said.

Figures to be released later Wednesday are expected to show that the annual rate of consumer-price inflation in the U.S. was unchanged in July, while figures for the eurozone also recorded a pickup in July.

There are growing concerns around the U.S. economy, where signs of a slowdown have included a softening in the jobs market, leading last week to jitters in money markets. Economists have flagged the renewed possibility of recession, and a frostier labor market, and investors expect the Federal Reserve to respond by lowering borrowing costs at its September meeting.

"The Fed doesn't want to cause a recession by keeping policy too tight for too long, if it can avoid it," economists at Dutch bank ING said in a research note this week.


Write to Joshua Kirby at joshua.kirby@wsj.com; @joshualeokirby


(END) Dow Jones Newswires

08-14-24 0301ET