Why an interest rate cut isn’t likely for a while despite inflation drop

ITV News Economics Editor Joel Hills explains whether the announcement could lead to a cut in interest rates

The flames are out but the fire still smoulders.

The headline annual rate of inflation fell back to the Bank of England’s 2% target last month for the first time since July 2021.

Price stability has been achieved.

Pay growth in the UK has been stronger than inflation for 11 months now but, when it comes to the hit to living standards, there is a lot of lost ground to make up and it’s noticeable that no one is declaring “the cost of living crisis” to be over.

“Inflation hits 2% in boost for Sunak,” declares the Telegraph.

I’m not even sure this holds. Consumer confidence is improving but surveys also suggest the feel-good factor isn’t there.

The Bank’s target does not resonate much with voters who are much more likely to point out how much more expensive everything is.

And voters are right. Prices are settling at a much higher level than three years ago.

Food is up 30%, energy bills are up 50%, rent is up 20% and mortgage repayments have doubled.

There’s an election on and politicians on all sides are prone to making bold claims.

It’s worth remembering that the main reason inflation took off and has subsequently returned to target is wild swings in the global price of energy and food rather than anything the government has done.

Higher interest rates have also had an impact.

And while strong pay growth is something to celebrate, it is also a mixed blessing.

Inflation in the “services” sector of the economy still glows too brightly for the Bank of England’s liking - reinforcing a concern that companies are funding higher wage settlements by increasing their prices rather than accepting lower profits.

The Bank thought services inflation would have faded to 5.3% by now, yet it’s running at 5.7%.

In forecasting terms, that’s quite a miss and one reason the markets have decided there’s little to no prospect of an interest rate cut on Thursday and that it is likely to be November before the Bank decides it’s time to lower the cost of borrowing.

Quite why services inflation is proving so persistent isn’t clear, although the hike on the National Living Wage (the government increased it by 9.8% in April) may be a factor.

The dousing down continues but we shouldn’t be downbeat. As the Resolution Foundation points out, the UK now has the lowest rate of inflation of any G7 country bar Italy.

But let’s also be realistic. In the context of this election, that fact probably only counts if voters can feel it. And many can’t.

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