The latest inflation data has landed, and for the Bank of England, it is a moment of cautious relief. Consumer price inflation held steady at 2.2 per cent in August, matching expectations and offering a brief respite from the volatility that has plagued markets. The steady hand came courtesy of easing food prices, which offset persistent rises in service costs and rents. Food inflation fell to 1.5 per cent, its lowest level in nearly three years, as supermarkets finally passed on lower wholesale costs to shoppers. But let us not pop the champagne corks just yet. The core measure, stripping out food and energy, still sits at 3.6 per cent. That is uncomfortably above target for Threadneedle Street.
The market reaction was muted, as one would expect when the numbers deliver exactly what was forecast. Gilt yields barely twitched. The ten-year yield hovered around 4.1 per cent. Short sterling futures inched up, pricing in slightly lower odds of a rate cut in November. The Bank of England is walking a tightrope. Governor Bailey has made it clear that the path to 2 per cent inflation is a bumpy one. This data supports that narrative. The stickiness in services inflation, which rose 0.1 percentage points to 5.6 per cent, is the real worry. That is the domestic beast that will not be tamed by global supply chains.
For the rate strategy, the message is unchanged. The BoE can afford to wait. With the labour market showing signs of cooling and wage growth moderating, the committee has time to see the lagged effects of previous hikes. But the market is pricing in only one more cut this year. That feels right. The risk is that inflation proves more stubborn than hoped, forcing the Bank to hold rates higher for longer. The other threat, of course, is the budget. The new government has hinted at fiscal loosening. If that comes to pass, it will make the BoE's job harder. They may have to keep rates elevated to offset the stimulus. For now, the market is giving them the benefit of the doubt. But the patient is not out of the woods. Inflation may have steadied, but the underlying price pressures are still bubbling. The Bank will hold its nerve, but investors should keep their eyes on services inflation and wage data. The next move will be data dependent, as always.
From a capital flight perspective, the steady inflation data reaffirms the UK's position as a relatively stable destination compared to the eurozone, where inflation remains stickier. But the pound has not reacted strongly. Sterling is little changed against the dollar, trading around 1.31. That shows the market is looking through this print and focusing on the fiscal outlook. The real story is the yield curve, which remains inverted. Two-year yields are still above ten-year, signalling recession fears. The market is pricing in a future where rate cuts are needed, but not yet. The BoE must navigate this gently. Any misstep could spark a sell-off in gilts, driving up borrowing costs for the government. That would not be helpful.
What does this mean for the average Briton? The headline inflation may be steady, but the cost of living crisis is not over. Food prices are easier, but energy bills are rising again. And rents are still climbing. The BoE's cautious approach will keep mortgage rates elevated. For those remortgaging, it is still a painful market. The best advice is to fix now rather than gamble on lower rates. The direction of travel is downwards, but the pace is slow. The Bank of England has its hand on the tiller, but the wind is against them. They will not act until they are sure inflation is vanquished. That is the right call. Fiscal discipline is needed from the government to make their job easier. Otherwise, we risk a repeat of last autumn's bond market tantrum. The bottom line: inflation is steady, but not yet safe. The course is set for rates to remain higher for longer. Investors should brace for a bumpy ride.
