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Investing.com -- U.K. consumer price inflation increased to 3.8% in July from 3.6% in June, slightly above the consensus forecast of 3.7%, according to official data released Wednesday.
The rise in inflation was largely driven by energy prices, with fuel price inflation improving from -9.0% in June to -6.7% in July, adding 0.1 percentage points to the overall CPI figure.
Services inflation also contributed to the increase, rising from 4.7% to 5.0%, exceeding the Bank of England’s forecast of 4.9%. This increase was partly due to unfavorable base effects in communications and restaurants/hotels sectors, as well as a 30.2% month-on-month jump in airfares reflecting the timing of school holidays.
Food inflation rose from 4.6% to 4.9%, higher than the 4.7% forecast by both the Bank of England and Capital Economics. This increase is particularly significant as food prices strongly influence household inflation expectations.
The Bank of England had anticipated this inflation rise in its August Monetary Policy Report, predicting CPI would reach an 18-month high of 3.8% in July.
Inflation appears on track to peak at 4.0% in September, when unfavorable base effects are expected to push services inflation above 5.0% and past increases in agricultural commodity prices could raise food inflation to 5.5%.
Despite the rising inflation, Capital Economics maintains that a November interest rate cut remains possible, citing the softening labor market which they believe will eventually lead to easing services inflation.
However, they acknowledge the risk that inflation expectations and wage growth could rise further, potentially delaying the next rate cut until 2026.