The UK economy is seeing an acceleration in consumer price growth, hitting 3.1% in August, up from 2.9% the previous month. While this inflationary uptick aligns with analyst projections, it remains primarily linked to oil price volatility and rising household energy bills. However, a closer look reveals a contrasting picture: while the headline index is rising, "core" inflation—which excludes volatile segments like energy and food—remains steady at 2.6%. This disparity confirms that price pressures have not yet structurally spread to the rest of the real economy.
A key indicator supports this assessment: the growth in average weekly earnings, which reached 2.9% for the May-to-July period. This wage growth, trailing behind inflation, reflects a real erosion of household purchasing power. Yet, for now, this phenomenon mitigates the risk of a wage-price spiral, where pay hikes would mechanically fuel further price increases. This constraint on income, coupled with stable service prices at 3.4%, provides the Bank of England with reassuring room for maneuver in the face of external pressures.
In this environment, the Monetary Policy Committee appears to favor the status quo. With the key interest rate held at 3.75%, the UK maintains a significant lead over the tightening policies seen in the eurozone or the United States. The probability of an immediate rate hike has dropped in the markets, although the institution remains under increasing pressure. The balance of risks is shifting, as sustained inflation above the target—potentially reaching the 4% mark by early 2025—could force central bankers to act before the end of the year.
The stakes extend well beyond the monetary sphere and are crystallizing on the budgetary front. The UK government, under pressure from international geopolitical tensions affecting commodity prices, finds its flexibility constrained by rising bond yields. This uncertain economic climate puts the executive in a delicate position, torn between campaign promises focused on supporting purchasing power and the need to curb an inflated budget deficit. In the short term, the stability of bond markets suggests that investors are currently favoring the central bank's cautious stance regarding inflation, which is widely perceived as exogenous.