UK inflation holds steady at 2%

UK inflation was unchanged in June, official data showed on Wednesday, in line with the Bank of England’s target.

According to the Office for National Statistics, the consumer price index grew by 2% in the year to June. Som analysts had expected it to soften slightly, however, to 1.9%.

The ONS said that restaurant and hotel prices, which rose "strongly", were the largest upward contributor. Second-hand car costs fell, but by less than this time last year.

However, that was offset by widespread sales pushing down clothing and footwear prices.

Core CPI, which excludes the more volatile elements of energy, food, alcohol and tobacco, rose by 3.5% in the 12 months to June, also unchanged on May.

The consumer prices index including occupiers’ housing costs (CPIPH) also held steady compared to May, rising by 2.8%. Core CPIH was 4.2%.

The Bank of England is widely expected to cut rates, which currently stand at a 16-year high of 5.25%, later this summer. But analysts are split over whether the cut will come in August or be pushed back to September.

While CPI remains at 2%, the BoE's long-term inflation target, the Monetary Policy Committee has flagged concerns about the level of core CPI.

Services sector CPI also remains stubbornly high, unchanged at 5.7% in June.

Laura Suter, director of personal finance at AJ Bell, said: “A fall to 1.9% had been predicted but didn’t materialise, putting the decision about a potential cut on 1 August finely in the balance. The odds are now around 50:50.

“The other thorn in the BoE’s side is services inflation. This sticky element of inflation is a big concern to the Bank and even a small drop in the right direction would have given more confidence that now is the right time for interest rate cuts.”

TD Securities said: “Overall, with headline inflation matching the MPC’s forecast, even though services came in a bit stronger than expected, we still think the MPC can go ahead and cut at the August Meeting. That said, it will be a close call – focus now will shift to May wages data.”

Martin Sartorius, principal economist at the CBI, said: "[The] data paves the way for an interest rate cut next month, which would begin to provide some relief for firms and households.

"Going forward the MPC will be mindful of potential upside risks to inflation in the near-term, as the domestic growth outlook improves."

Food and non-alcoholic beverages rose by 1.5% in the year to June, down from 1.7% in May and the lowest annual rate since October 2021, when it was 1.3%. A year ago, it was 17.4%.

Factory gate prices, meanwhile, were up 1.4%, down on May’s 1.7% rise. The cost of raw materials fell by 0.4%, compared to a revised fall of 0.7% last month.