U.K. Inflation Holds at High Level Ahead of Bank of England Meeting — 2nd Update

By Ed Frankl

U.K. annual inflation stayed at an elevated level in August, likely keeping the Bank of England on wait-and-see mode as it prepares to hold its key interest rate this week.

Consumer prices were 3.8% higher than the same month of last year, matching July's rate, the Office for National Statistics said Wednesday. Economists polled by The Wall Street Journal expected a slightly higher 3.9% annual rise.

The BOE said in August that it expected inflation to reach 4% by September, largely as a result of government-regulated increases to water bills and rises in energy and food prices.

However, inflation remains stubbornly higher in Britain than in the neighboring eurozone, where prices were 2.1% up on August of last year. Inflation has jumped from 1.7% in September 2024.

While the European Central Bank President Christine Lagarde has said its monetary policy is in "a good place" with the key interest rate there at 2%, the outlook for borrowing costs in the U.K. looks more challenging. The bank's target for medium-term inflation is 2%.

BOE Gov. Andrew Bailey told lawmakers earlier this month that there was "considerably more doubt" about when to next cut the key rate from the current 4%.

Investors currently expect the central bank to hold the interest rate at its November meeting, ending the quarterly pace of rate cuts in place since August last year, that Bailey has called "careful and gradual".

Food inflation, which rose for a fifth-straight month to 5.1% in August from 4.9% in July, caught the attention of policymakers at the BOE's last meeting. They worry that households' inflation expectations can be strongly influenced by food prices.

They noted that April's 6.7% rise in minimum wage has fed through to higher food costs, as have new rules that shift food-packaging waste management from local government to producers.

Meanwhile, services prices remained high, rising 4.7% on year, largely a result of restaurant and hotels, the ONS said.

However, there are signs that the labor market is cooling, with pay growth declining in the three months to July and payrolls shrinking, albeit only marginally. The BOE has said the rollback in wage growth should help headline inflation return to the bank's target in the first half of 2027.

The looser labor market should bring down inflation back to similar rates as in the eurozone and U.S., allowing the BOE to cut rates to 3% by the end of next year, Capital Economics chief U.K. economist Paul Dales said in a note to clients.

"But we think the upside inflation risks are just too high for the Bank of England to cut interest rates [this week] or, more significantly, at the following meeting in November," he added.

Write to Ed Frankl at edward.frankl@wsj.com