InflationWatch - August 2024

In the wake of the Covid-19 pandemic, inflation rose further and for longer than most market participants expected in many countries, including the UK.

Expansive monetary policy and fiscal stimulus, disruption to supply chains and a shift in demand from services to goods during the pandemic all placed upwards pressure on inflation. The Russia-Ukraine conflict, and the global supply-shock emanating from it, exacerbated these price pressures.

Headline inflation has fallen significantly since its peak in October 2022, as supply-side disruptions have eased and tighter monetary policy has taken effect, but underlying measures of inflation still point to stubbornness in price pressures.

In this month's issue of InflationWatch, some highlights for the quarter include:

• Headline CPI fell to the Bank of England’s (BoE) 2% target for the first time in almost three years in May, remaining there in June. However, inflation is expected to pick up slightly in the second half of 2024.
• Food, energy and non-energy industrial goods disinflation has run its course, with market participants’ attention turning increasingly to domestic price pressures – those being strong wage growth and service-sector inflation.
• Amid progress against inflation, the BoE cut its base rate by 0.25% pa from a 16-year high to 5.0% pa in August. However, we expect the BoE to tread cautiously and focus on slowly reducing rates to less restrictive levels.
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