Market News

BY  Chris Price

There will be no more interest rate cuts this year as inflation is expected to remain “miles above target”, economists have warned.

Prices rose at an annual pace of 3.8pc in July, according to the Office for National Statistics (ONS), up from 3.6pc in June and higher than analysts’ predictions of a climb to 3.7pc.

Transport costs were the largest upward driver of prices, mainly as a result of higher air fares, while food inflation increased from 4.5pc to 4.9pc, the highest level since February last year.

Consumer prices for beef surged by 25pc, the largest annual increase since comparable data began a decade ago.

Coffee, butter and chocolate also saw sharp price increases of nearly a fifth as volatile weather conditions hit global supply.

The pound edged higher and housebuilding stocks fell as traders bet there was a less than 50pc chance that policymakers would lower borrowing costs again in 2025 after this month’s rate cut to 4pc.

It came as Tesco announced it would increase the price of its meal deal by 25p on Thursday. The price will rise from £3.60 to £3.85 for Clubcard shoppers and from £4 to £4.25 for all other customers. Tesco also said it will add 50p to the price of its premium meal deal, raising the price from £5.50 to £6.

Andrew Wishart of Berenberg said policymakers would not cut rates again this year as upward pressure on inflation from global food prices and energy would likely peak in the autumn.

Elliot Jordan-Doak, of Pantheon Macroeconomics, warned inflation will remain around 3.7pc on average for the rest of 2025 as inflation stays “miles above target for the foreseeable future”.

Mr Jordan-Doak said: “We expect headline inflation to remain above 3pc until April 2026, forcing the MPC to stay on hold for the rest of this year at least.”

The Bank of England’s Monetary Policy Committee (MPC) has a target to bring inflation down to 2pc but the pace of price rises has fallen below that level just once since April 2021.

Oxford Economics forecast that inflation will not drop below the Bank’s target until beyond 2027 and said it expects CPI in Britain to average 3.5pc this year and 2.8pc in 2026.

It follows the chancellor’s decision in her Budget last year to impose increases in National Insurance contributions and the minimum wage on employers, which took effect from April.

Closely-watched services inflation rose faster than expected from 4.7pc to 5pc, as businesses were hit with higher costs. The figure was also fuelled by rising prices for hotel stays as Oasis reunited for their first tour in 15 years.

Mr Wishart said: “The 5pc in services prices in July is sufficient to keep headline CPI inflation at 2.5pc even if prices in all other categories stopped rising.”

Suren Thiru, economics director at ICAEW, added: “July’s outturn probably extinguishes hope of a September interest rate cut, while strengthening underlying inflationary pressures calls into question whether policymakers will be able to relax policy again this year.”

Chancellor Rachel Reeves said there is “more to do” to ease the cost of living.

She said: “We have taken the decisions needed to stabilise the public finances, and we’re a long way from the double-digit inflation we saw under the previous government, but there’s more to do to ease the cost of living.”