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(Bloomberg) -- UK inflation is expected to pick up for the first time this year in new data that’s likely to keep Bank of England policymakers wary about pushing ahead with further interest rate reductions next month.

Forecasters expect official data on Wednesday to show that inflation accelerated to 2.3% in July from 2% in May and June as a favorable tailwind from energy bills fades out of the figures, a survey of economists by Bloomberg showed on Monday. Other data this week is likely to show the labor market loosening, reducing upward pressures on pay.

The data are likely to illustrate the difficult balancing act that Governor Andrew Bailey and the rest of the BOE’s Monetary Policy Committee have after voting 5-4 to cut interests rates earlier in August. 

Official forecasts released alongside that the BOE decision put July inflation at 2.4% and warned of increasing inflationary pressures in the coming months. On the other hand, unemployment is also likely to rise, posing fresh risk to the economy’s recovery from last year’s recession.

On Monday, hawkish BOE rate-setter Catherine Mann warned policy makers not to be “seduced” by headline inflation falling to the 2% target, pointing to lingering pressures in the jobs market.

“There are a lot of vacancies, just a lot of desire to employ people and there don’t seem to be workers out there, and of course, that is part of the wage setting process,” Mann said in an interview with the Financial Times podcast The Economics Show with Soumaya Keynes. She said that an “upward ratchet” in wages and prices will “take a long time to erode away,” warning that pay settlements next year are one of the upside risks for inflation.

The data this week will set the tone for BOE policy, with markets expecting a delay before the next rate cut. It will also be closely watched by Prime Minister Keir Starmer’s government, which is hoping for lower interest rates and a pickup in growth to help bring in more money to the Treasury, funding improvements to public services.

“The resurgence in headline inflation in the second half of the year will create a challenging backdrop for the BOE,” said Dan Hanson, chief UK economist at Bloomberg Economics. “While the rise can be easily explained by base effects associated with energy prices, the optics of easing policy when inflation is on the rise aren’t favorable.”

Forecasters expect this week’s figures to entrench the view that the BOE will leave rates on hold in September and wait until November before reducing borrowing costs again.

While the pound is still the best-performing Group-of-10 currency this year, it has struggled for momentum recently partly due to the outlook for a slow rates-loosening cycle. Sterling has fallen against the euro for the last four weeks, its longest losing streak since December 2022.

Should inflation and growth data come in softer-than-expected, sterling will likely be vulnerable to another leg lower. That’s because investors are positioned for less easing from the BOE than both the European Central Bank and the Federal Reserve in the coming months on the view that price pressures are stickier in the UK than elsewhere.

Money market pricing implies two further quarter-point cuts from the BOE this year, compared to three more from the ECB. For the Fed, investors are bracing for a larger half-point hike alongside a couple quarter-point reductions.

However, investors still see a small chance of another move as soon as September if turbulence on global markets deepened and the UK saw a string of dovish data surprises.

“We see no urgent case for a follow up rate cut, but the BOE is clearly looking at this data and if it shows they’re right to be chilled about services inflation pressures then it will open up that question,” said Elizabeth Martins, UK economist at HSBC. “The message from the BOE was ‘we’re not rushing into the next one.’”

The predicted uptick in Wednesday’s inflation reading will be driven by a plunge in energy bills last July falling out of the annual calculations, a shift that the BOE said on Aug. 1 that it believes will reveal “more clearly the prevailing persistence of domestic inflationary pressures.” 

Officials expect inflation to continue to edge higher over the rest of the year before cooling again, though hot services prices risks causing price pressures to linger.

Inflation will be just one of four data releases this week that could play into the BOE’s thinking in the coming months:

• On Tuesday, labor market data is likely to show an increase in unemployment to 4.5%, the most since August 2021. Total wage growth probably will slow sharply to 4.6% in the three months through June from 5.7% previously. Together, that data will suggest fewer inflationary forces coming from the jobs market, where worker shortages since the pandemic have fed concerns about a wage-price spiral.
• On Thursday, gross domestic product data is expected to show that the brisk recovery from last year’s recession continued in the second quarter. Forecasters predicted a gain of 0.6% in the three months through June after a 0.7% gain previously.
• On Friday, retail sales are likely to be boosted by sunnier weather in July with a 0.6% month-on-month jump predicted, partly reversing the 1.2% drop the month before.

The figures may add to or allay the central bank’s concerns over the strength of the economy’s recovery after flagging growth as an inflationary threat at its August meeting.

“Growth in the first half has been surprisingly stronger than the bank has expected so at least from domestic data, it seems that the bar for a September rate cut is relatively high,” said Anna Titareva, European economist at UBS.

--With assistance from Irina Anghel, Harumi Ichikura and Greg Ritchie.

(Adds comments from BOE policy maker Catherine Mann)