Inflation in the UK is still high at 3.8 per cent as prices of food and drinks spiked for the fifth month in a row, revealed data released by the Office for National Statistics.
But despite the inflation figures being double the Bank of England’s target rate of 2 per cent, economists believe the central bank will hold steady its interest rates in its meeting on September 17.
Stubbornly high inflation has been one of the reasons the Labour government's poll ratings have fallen sharply since it came to power in July 2024.
The year to come will be significant for the treasury chief, Rachel Reeves, who will be hoping inflation starts to drop down towards target so that it relieves cost-of-living pressures that are hurting households and undermining the government’s support.
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“I know families are finding it tough and that for many the economy feels stuck," she said after the figures were released.
“That's why I'm determined to bring costs down and support people who are facing higher bills," she added.
Reeves is set to present the annual budget on November 26, in which she is widely expected to increase taxes again to bolster revenues and simultaneously introduce policies to ease the cost-of-living pressures.
Many critics blame Reeves personally for the increased inflation this year, saying her decision to increase taxes on businesses to plug a budget hole prompted firms to increase prices.
While most analysts were anticipating a modest increase in inflation in August, the fact that it remained steady has cemented market expectations that the Bank of England will keep interest rates unchanged on Thursday.
It first started cutting borrowing rates in August 2024 after the unwinding of the previous surge in inflation in the wake of Russia's invasion of Ukraine. Over the next year, the bank gradually decreased rates every three months. When it cut its main rate to 4 per cent this August, it was largely expected that there would be no further reduction at the September meeting.
If the bank were to continue to cut interest rates in the manner it has been doing so, the next meeting in November would see a further reduction.
Since inflation has proven to be stickier than anticipated previously, economists are divided on whether another cut is forthcoming.
“Several months of disappointing data has highlighted the U.K.'s unwanted position as an international outlier for sticky' inflation, with the highest headline inflation of any G-7 economy," said James Smith, research director at the Resolution Foundation think tank.
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