Inflation held steady last month, keeping interest rates on track to fall this year in a boost for Sir Keir Starmer.
Prices, as measured by the Consumer Prices Index (CPI), rose by 2.2pc in the year to August, according to the Office for National Statistics (ONS).
This was unchanged from July despite a big jump in European airfares as parents took their children away for the summer holidays.
The headline rate was also in line with economists’ expectations.
However, services inflation, which the Bank of England has been monitoring closely, rose sharply ahead of a key interest rate decision on Thursday.
Here’s why the Bank is expected to keep rates on hold at 5pc.
Services prices rose by 5.6pc in the year to August, well above Threadneedle Street’s 2pc target.
Bank policymakers have consistently warned that services inflation, which is more influenced by wages, is still too high for comfort.
The increase in services inflation was driven by higher air fares, which climbed by 22pc between July and August 2024.
This is the second-largest August increase since the ONS started collecting data in 2001, with the price of short-haul flights rising as families went away for the school summer holidays.
“There’s no denying that services inflation is still too high for the Bank of England’s liking,” says Ruth Gregory at Capital Economics.
On a more positive note, inflation at restaurants and hotels eased to 4.4pc in the year to August, from 4.9pc in the year to July. This is the lowest rate since July 2021.
While headline inflation was steady, core inflation, which strips out volatile components such as energy and food, rose 3.6pc in August, up from 3.3pc in July.
The headline number also masks big differences between price movements in goods and services.
While goods prices overall are falling by 0.9pc on an annual basis, services prices continue to rise sharply. Many economists fear that additional rises in the minimum wage could keep services inflation higher for longer.
By contrast, prices outside these “core” measures are down.
The average price of petrol fell by 2.1p per litre between July and August 2024 to £1.42, down from £1.48 in August 2023.
Diesel prices fell by 2.6p per litre in August to just under £1.48 per litre. However, analysts have warned that Rachel Reeves may increase fuel duty in the Oct 30 Budget, which would push up prices.
There is better news when it comes to prices on supermarket shelves, which are up 1.3pc compared with a year ago.
Food inflation has been easing for more than a year, with the drop from 1.5pc in July representing the 17th consecutive month of easing.
The price of some essentials have stabilised. A 500g packet of pasta is now 93p, compared with 95p a year ago, while four pints of milk are roughly the same price at £1.51, according to the ONS.
However, lower inflation does not mean prices are falling, just rising less quickly. In some cases, prices continue to rise sharply.
A drought in the Mediterranean has seen the average price of a bottle of olive oil rise by 40pc over the past year to £9.12, while a doubling of cocoa prices on world markets owing to adverse weather has pushed up the price of a large chocolate bar by 15pc over the past year to just over £2.
The amount paid by companies both in terms of raw material costs and at the factory gate has historically been a good indicator for consumer prices – and these have been cooling for some time.
Producer input prices fell by 1.2pc in the year to August, down from a revised increase of 0.2pc in the year to July.
Meanwhile, factory gate prices rose by 0.2pc in the year to August, down from an increase of 0.8pc in the year to July 2024.
Grant Fitzner, chief economist at the ONS, said there are encouraging signs that the era of high inflation was over. “It’s hard to see where a significant uptick in inflation might come from at the moment,” he told the BBC.
The Bank of England cut interest rates for the first time in four years last month, and markets still expect two more cuts before the end of the year to 4.5pc.
However, Wednesday’s data suggests the path to sustained 2pc inflation remains some distance away, and is likely to be complicated by plans to keep raising the minimum wage, including at much faster rates for younger workers.
Investors have trimmed back bets on an immediate rate cut to just 15pc.
Darren Jones, Chief Secretary to the Treasury, said: “Years of sky-high inflation have taken their toll; and prices are still much higher than four years ago. So, while more manageable inflation is welcome, we know that millions of families across Britain are struggling.”
The Bank already expects inflation to climb in the second half of the year, hitting 2.7pc in the final quarter of 2024.
Andrew Wishart, senior economist at Berenberg Bank, noted that a 10pc rise in the energy price cap to £1,717 per year for a typical household from October would put renewed pressure on households after a year of falling energy bills.
“The large [downward] drag on inflation from energy prices will wane over the remainder of the year,” he said.
“Despite some evidence of labour market cooling, we expect the Bank to keep the rate on hold at 5pc. That would make it an outlier after the ECB cut last week and the Fed lowers rates on Wednesday evening.”
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