U.K. August-24 CPI Inflation Report

Ahead of the Bank of England’s decision, inflation is easing, but rising rents pose a risk

Key takeaways:

• UK Consumer Price Index (CPI) increased by 2.2% year-over-year (y/y) in August, in line with market consensus and July’s figure, both at 2.2% y/y.

• Core CPI in August increased by 3.6% y/y, slightly higher than the consensus forecast of 3.5% and higher than July’s figure, at 3.3%.

• Similarly to other advanced economies, these pressures are primarily concentrated in the services sector, which saw an increase of 5.6% y/y in August, higher than the 5.2% y/y observed in July. Meanwhile, the goods sector continues to experience deflation, this time of 0.9% y/y, higher than July's decrease of 0.6% y/y.

• Within the services sector, the main driver of rising inflation remains the housing component of the CPI. In August, actual rents for housing increased by 7.2% y/y (versus 7.1% y/y in July, 7.2% y/y in June and 6.4% y/y in August 2023).

• Our supercore service inflation, which removes actual rents for housing, increased by 5.3% y/y, sensibly higher than July’s figure of 4.8% y/y. The Travel and Transport component of service inflation (with a weight of 15% in our supercore service inflation and 6% in overall inflation¹) has been the main driver of this increase: in July this component rose by 2.7% y/y while in August the increase has been by 6.5% y/y.

• The Bank of England's monetary policy decision is set for tomorrow, and the current consensus among analysts is that the BoE will keep rates unchanged. The recent wage improvement appears to ease concerns about inflationary pressure. Excluding the impact on the transport sector, the overall inflation outlook could be consistent with a further 25bps cut at the upcoming meeting. This scenario may gain further support from today’s Federal Reserve policy decision.

Related posts (with links)

UK July-24 CPI Inflation Report (previous release);

Has Wage Growth Fueled Inflation in the UK? (related post);

At the Core of UK Inflation (construction of supercore service inflation and supercore wage index);

FT Alphaville on Catch-22 (short version of the Catch-22 effect);

Is the Bank of England in a Catch-22 Situation? (long version of the Catch-22 effect)?

Review of the Inflation Release

In August 2024, consumer prices increased by 2.2% year-over-year (y/y), in line with market consensus and unchanged from the 2.2% year-over-year reported in July. On a month-to-month basis, prices rose by 0.3%, compared to a decrease of 0.2% seen in July.

Core CPI, which excludes food and energy, rose by 3.6% year-over-year (y/y), slightly higher than the consensus forecast of 3.5% y/y and July’s figure of 3.3% y/y (see Charts 1 and 2). On a month-to-month basis, it increased by 0.4%, higher than the 0.1% increase recorded in July.

The services sector remains the primary driver of inflation, with an increase of 5.6% y/y in August, higher than the 5.2% y/y figure seen in July. Conversely, the goods sector continues to experience deflation, recording a 0.9% y/y decrease in August, a higher decrease than the 0.6% decrease observed in July. On a monthly basis, service inflation has risen by 0.4% m/m, lower than the 0.5% observed in July and the 0.6% recorded in June. On a monthly basis, goods inflation increased by 0.2% m/m, higher than the decrease of 0.8% m/m in July and the 0.3% m/m decrease seen in June. Chart 3 highlights the dichotomy between the persistent inflation in services and the quicker adjustment in goods prices.

As anticipated, the Catch-22 effect remained strong in August, with the housing component continuing to be the primary driver of inflationary pressures (Table 1). Actual housing rents rose by 7.2% year-over-year, up from 7.1% y/y in July and the same rate of 7.2% y/y increase in June, reinforcing the upward trend observed since September 2021. On a month-to-month basis, rents increased by 0.3% (compared to 1.7% m/m in July and 0.4% m/m in June).

Supercore services, as defined in a previous post (see Chart 4), increased by 5.3% y/y, sensibly higher than the 4.8% y/y of July. The increase has been mainly driven by the Travel and Transport Services component of our supercore service index. The Travel and Transport Services component has increased by 6.5% y/y compared to 2.7% y/y in July reflecting the significant increase in passenger transport by air. The Travel and Transport Service component accounts for 15% of supercore service inflation.

On a monthly basis, the slowdown in supercore service inflation has partly reversed, with an increase of 0.4% m/m in August, higher than the 0.3% m/m seen in July.

However, in a recent post, we examined the relationship between supercore service inflation and supercore wages and found that wages have not been the primary driver of supercore inflation.

In this context, last week featured the release of nominal wage data. Chart 5 highlights our updated supercore wage index, which inched up to 3.7% year-over-year in July, from 3.6% in June. Additionally, overall wages showed a decline compared to June, coming in at 4.0% year-over-year versus 4.6%.

Policy Implications

With the Bank of England’s decision set for tomorrow, market consensus indicates that the committee will likely keep rates unchanged following the August cut. However, two factors could prompt the BoE to consider a 25bps cut: (i) slower wage growth in July, along with the recognition of the unique impact of the Travel and Transport Service component on supercore service inflation, and (ii) today’s Federal Reserve decision, which could encourage other central banks to accelerate their easing cycles.

Table 1: CPI by components (% YoY)

Source: UK Office of National Statistics (ONS)

Table 2: CPI by components (% MoM)

Source: UK Office of National Statistics (ONS)

1. Note that our supercore service inflation is sourced from Tables 27-28 of the Consumer Price Inflation Detailed Reference Tables Excel file.