LONDON — U.K. inflation held steady during the month of August, data from the Office for National Statistics showed Wednesday, and matched analyst expectations.
The headline consumer price index (CPI) was in line with the previous 2.2% reading in July and also matched a prediction from a Reuters poll of economists. Headline CPI had come in at 2% in May and June, in line with the Bank of England's target rate.
Services inflation — which is closely watched by the BOE, given its dominance within the U.K. economy and its reflection of domestically-generated price rises — rose to 5.6% in August from 5.2% in July.
Core inflation, excluding energy, food, alcohol and tobacco, came in at 3.6%, up from the 3.3% recorded in July.
Higher air fares were the largest contributor to upward price pressures, having risen from a lower base last year, the ONS said. Motor fuel, hotels and restaurants, meanwhile, saw the biggest declines.
BOE policymakers will meet on Thursday to give their latest monetary policy decision, with traders largely expecting the bank to hold rates steady.
Bets for a second consecutive 25 basis point cut doubled to almost 40% this week on the prospect of a more aggressive reduction in borrowing costs when the U.S. Federal Reserve meets Wednesday.
However, Richard Carter, head of fixed interest research at investment management firm Quilter Cheviot, said the fresh print was likely to shift expectations back to a more cautious approach.
"Despite recent data showing a stagnation in UK economic output and easing wage growth, core inflation remains sticky, with services inflation rising from 5.2% to 5.6% which will weigh heavily on the BOE's decision-making," Carter said in a note.
"This complicates the central bank's ability to justify further easing in the short term, especially when compared to the more aggressive stance of the Federal Reserve. The BOE's quarter-point rate cut in August marked its first in over four years, but there is probably still a while yet until we get another cut," he added.
Ruth Gregory, deputy chief U.K. economist at Capital Economics, echoed those sentiments, saying the rise in services inflation was likely to prove especially concerning to the central bank. She added that further upward price pressure could be expected in the coming months on the back of higher utility prices.
"Overall, a pause on interest rate cuts was already expected tomorrow and today's release cements that view. We continue to assume the next 25 basis point rate interest rate cut will take place in November and that rates will be cut at alternative BoE meetings until June," Gregory said.
The reading also comes ahead of the U.K.'s forthcoming Oct. 30 Autumn Statement, during which the new Labour government will set out its budget plans for the new term.
Chief Secretary to the Treasury, Darren Jones, said he welcomed "more manageable inflation" but noted that significant work was still needed to "fix the foundations" of the economy.