UK inflation is anticipated to rise again, weeks after the Bank of England reduced interest rates for the first time in over four years.

This increase is expected to be reflected in figures due to be published this week, with City analysts predicting that inflation will have climbed to 2.3 per cent in July, up from the 2 per cent rate that had held steady in the previous two months.

The upcoming data will provide a crucial insight into how the UK economy has performed in the first month under the Labour government. In addition to inflation, the Office for National Statistics (ONS) is set to release updates on economic growth, the labour market, and retail sales.

Gross domestic product (GDP) is projected to have grown by 0.2 per cent in June, maintaining a quarterly growth rate of 0.7 per cent—the steepest increase among the G7 group of wealthy nations. BDO, the consultancy firm, noted that its output index accelerated at the fastest pace in two years in July, driven largely by the manufacturing sector and a robust summer tourism season.

Labour leader Sir Keir Starmer has committed to raising long-term economic growth to 2.5 per cent and making the UK the fastest-growing economy in the G7. However, analysts remain sceptical about achieving this target without a substantial boost in investment.

Investec analysts highlighted that the hospitality sector likely received a boost in June from the European football championships, which Barclays reported had led to increased spending in pubs.

One of the key factors behind the expected inflation increase in July is the unfavourable comparison with energy prices from the previous year. Sanjay Raja, chief UK economist at Deutsche Bank, pointed out that “positive base effects, mainly from energy prices, will likely push headline inflation higher through the second half of 2024. But there is good news. Services inflation should continue its descent, albeit gradually.”

Services inflation, which stood at 5.7 per cent in June, has been closely monitored by the Bank of England as it considers further interest rate decisions. At its recent Monetary Policy Committee meeting, where the base rate was lowered by a quarter-point to 5 per cent, the Bank signalled a shift in focus towards broader economic trends rather than isolated indicators.

International economic developments are also expected to influence UK markets this week. Last week saw significant volatility in Asian, European, and American share prices following the release of US data showing that the economy added only 117,000 jobs in July—a sharp slowdown from June, which stoked fears of a recession.

New estimates from the US Bureau of Labor Statistics, due on Wednesday, are expected to show a slight dip in annual inflation to 2.9 per cent in July from 3 per cent in June.

Following these weaker-than-expected jobs figures and the subsequent global market turbulence, investors have begun pricing in a more aggressive approach from the US Federal Reserve. There is speculation that the Fed might implement an emergency interest rate cut before its next meeting on 18 September, with predictions that the federal funds rate could be lowered by a full percentage point this year from its current 23-year high range of 5.25 per cent to 5.5 per cent.

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UK inflation set to rise after Bank of England’s interest rate cut