The Office for National Statistics confirmed this morning that UK inflation remained steady at 2.2% in August, defying expectations of a modest uptick. The headline Consumer Prices Index (CPI) was unchanged from July, thanks largely to a slowdown in food price rises which offset persistent pressures in services.
The Treasury was quick to claim victory, with Chancellor Rachel Reeves hailing the data as evidence that “fiscal discipline is bringing inflation down.” But for those of us who remember the 1970s, the whiff of stagflation is unmistakable. Inflation is stuck above the Bank of England’s 2% target, and the underlying detail is hardly reassuring.
Core CPI, which strips out volatile food and energy, inched up to 3.6% from 3.5%.
Services inflation, the Bank’s favourite gauge of domestic price pressures, remained elevated at 5.2%. This is not a story of mission accomplished; it is one of sticky inflation and a central bank caught between a rock and a hard place.
The gilt market reacted with a shrug: the 10-year yield barely budged at 3.95%, while sterling edged up slightly against the dollar. The City is pricing in a rate cut at the November meeting, but today’s data will give the Monetary Policy Committee pause.
Food prices fell by 0.3% on the month, the first outright decline since June 2023, providing some relief to hard-pressed households. But this is a double-edged sword: lower food inflation is good for consumers but bad for supermarkets’ margins, and it masks the fact that energy bills are still 20% higher than three years ago.
The Treasury’s spin is predictable. Reeves’s statement emphasised “tough decisions on public spending” and the importance of “putting the public finances on a sustainable footing.” Yet the government’s own fiscal watchdog, the Office for Budget Responsibility, has warned that the UK’s debt-to-GDP ratio is on an unsustainable trajectory.
In effect, the Treasury is trying to have its Budget cake and eat it: preaching fiscal rectitude while the national debt approaches 100% of GDP. Markets are not fooled. Capital flight remains a concern: foreign investors sold £8bn of UK gilts in July, and the current account deficit is still yawning.
Meanwhile, the Bank of England faces a conundrum. Lower headline inflation argues for rate cuts to stimulate a moribund economy. But stickier core and services inflation argues for restraint.
Governor Andrew Bailey has hinted at a “gradual” approach, but gradualists tend to get run over by events. The real risk is that the UK is slipping into a low-growth, high-inflation equilibrium: what economists call “stagflation lite.” The GDP figures for Q2 were revised up slightly, but the trend is flat.
Business investment remains weak, and the labour market is cooling: vacancies fell for the 16th consecutive month. The Chancellor’s fiscal headroom is negligible, meaning any economic shock could force new austerity. So, while the headline number is a relief, the diagnosis is clear: inflation is not beaten, it is merely tamed.
The Treasury is playing a dangerous game, masquerading tight fiscal policy as virtue when it is really necessity. And the Bank of England, once again, is having to choose its poison: inflation or recession.
