Bank of England may face lower inflation despite ‘Oasis bump’
Bank of England forecasts on inflation for July could be too high despite suggestions Oasis concerts could make prices jump, forecasters have said.
The Bank’s last Monetary Policy Report took a gloomy view on the state of the UK economy as it claimed inflation would hit 3.8 per cent in the month of July.
But leading forecasters have said the Bank’s prediction could be too high, with inflation expected to come in in slightly lower than it forecast.
Such a scenario could ease concerns that inflation has proven more difficult to bring down, which would lead to further calls for interest rates to be cut.
A Bloomberg poll of economists said consumer price index (CPI) inflation would hit 3.7 per cent while the Bank of England said earlier this month it could reach 3.8 per cent.
Inflation data is key for coming months
July is a key month for price data given retail price index (RPI) inflation, which includes some housing costs and is less widely used as a metric, is used to calculate increases in train ticket prices.
The consensus forecast for RPI inflation is 4.6 per cent, which could lead to train fares rising by 5.6 per cent next year if recent trends are followed.
Bank economists believe a rise in price growth over the summer will hit its climax in September when CPI inflation could hit four per cent, which could be more damaging for the government given the month’s inflation data is used to calculate increases in benefits and the triple lock pension.
Capital Economics’ Paul Dales said it will be crucial how far services inflation rises over the summer months, with some ”unfavourable” effects likely to add to price growth from summer events, including in the communication sector and restaurants or hotel prices.
‘The Taylor Swift effect’
“Just like the Taylor Swift effect, any upward influence on hotel prices from the Oasis concerts is likely to be very small,” Dales said, adding that less volatile items in the inflation basket may see lower price growth and offset increases.
Goldman Sachs said it expects services inflation to increase marginally in July due to some initial big price hikes in June already being made.
“Much of the strength in the June number was driven by volatile components, which points to risks of payback at this print, while the annual rate of rent inflation should decline given smaller increases in non-private rents compared to a year ago,” analysts at the Wall Street bank said.
“However, base effects resulting from a sharp decrease in accommodation services price in July 2024 falling out of the figures should push up on the annual rate of services inflation.”
Goldman Sachs said its models show inflation in some areas falling “notably” while Deutsche Bank said markets could price in fewer cuts if inflation ticks up more than expected.
“If our projections [of 3.8 per cent inflation] prove to be correct, the market may further reduce the implied chance of another cut by the November meeting, which in recent days has fallen firmly below 50 per cent,” Deutsche Bank’s Sanjay Raja said.
Leading City analysts have suggested that the effects of falling interest rates were beginning to show in people’s decision-making, with lower savings rates now having an effect on investment.
“We’ve reached a tipping point, where falling savings rates have convinced would-be investors that it’s time to take the plunge and make the most of the huge growth potential offered by investing,” said Sarah Coles, head of personal finance, Hargreaves Lansdown.
“It seems that the Bank of England cutting rates, and banks following suit with savings deals, has persuaded some savers that they’d be better off investing.”
But the threat of high inflation has continued to scare businesses, with price growth cited as a top concern in a KPMG survey of top businesses across the country.