Inflation surprise: How Taylor Swift may have prevented an interest rate cut on August 1

News that UK inflation held steady in June could be seen as increasing the chances of a much-anticipated cut in interest rates at the start of next month, but that August 1 reduction is no shoo-in.

The latest official statistics showed that the annual measure of consumer prices index (CPI) inflation was unchanged at 2 per cent in June, staying at the Bank of England’s target level for the second month running. It means that prices, on average, are still rising but at a rate that the central bank is comfortable with, after nearly three years of above-target inflation fuelling the cost-of-living crisis. That CPI rate peaked at 11.1 per cent in October 2022.

The data for June showed that prices in restaurants and hotels rose more than a year ago, partly due to the “Taylor Swift effect” as her concert tour hit the UK, putting upward pressure on the headline inflation rate. But prices of clothing and footwear fell last month, which helped ease the overall reading.

Business leaders have been pushing for a cut in interest rates as casualties continue to pile up, particularly in the retail and hospitality sectors.

However, central bank policymakers, who are due to meet to decide on that next move on rates on August 1, are likely to be concerned at stickier-than-expected core and services inflation. Services CPI - which looks only at services-related categories such as hospitality, travel and culture, covers the bulk of the economy and is watched closely by the Bank’s nine-strong monetary policy committee (MPC) - held at 5.7 per cent in June, matching the rate for May.

A series of interest rate hikes has pushed the official bank base rate to a 16-year-high of 5.25 per cent, spelling misery for millions of mortgage holders, borrowers and businesses, who have found themselves squeezed from both sides as consumers rein in spending. Hopes have been high for months now that the first cut in rates will occur before the end of the summer, sparking a series of quarter-point reductions, providing inflation holds steady.

Weighing up the tsunami of reaction to the latest inflation data, that initial rate cut in just two weeks’ time now looks far from certain. The phrase used repeatedly by economists and analysts is “knife edge”. The MPC decision also follows a warning this week from the International Monetary Fund (IMF) that countries including the UK and the US are “seeing some persistence” in inflation that could mean interest rates have to stay “higher for even longer”.

Luke Bartholomew, deputy chief economist at Scottish investment heavyweight Abrdn, said: “[The] inflation report will keep the Bank of England’s August rate decision on a knife edge. The strength of hotel price growth is suggestive of a so-called Taylor Swift effect on prices, but policy makers will almost certainly look through this kind of dynamic. More fundamentally, the ongoing stickiness of services inflation will leave the Bank wondering how long inflation will stay at the 2 per cent target once favourable base effects have passed and domestic price pressures start to drive headline inflation again.”

Tom Stevenson, investment director at Fidelity International, said a second consecutive month of headline inflation at target made a cut in interest rates on August 1 “more likely but not yet a shoo-in”.

“The key questions for the Bank of England rate setters remain persistently high service sector inflation and wage growth,” he noted. “It is a sign of how far we have come in the fight with inflation that the repeat 2 per cent reading elicited a shrug. It is only 20 months ago that the UK was an inflation outlier with prices rising at 11.1 per cent. But policy makers are more concerned with the pace of price rises in the service sector, which accounts for 80 per cent of the UK economy.”

June’s headline inflation rate came in slightly ahead of expectations, as several analysts were predicting it to dip below target to 1.9 per cent, though that is expected to spike over the coming months before falling back to target. Hotel prices soared by 8.8 per cent in June compared with the previous month, according to the latest data.

Laura Suter, director of personal finance at investment platform AJ Bell, said: “Bank of England policymakers may be cursing Taylor Swift, as fans spending on hotel rooms and in restaurants during her Eras tour is likely to be one reason that prices rose in June, meaning that overall inflation flatlined rather than fell. The odds are around 50:50 as to whether we will see the first rate cut next month - a move that would be welcomed by the public and the new government alike.”

Business leaders have been pushing for a cut in interest rates as casualties continue to pile up, particularly in the retail and hospitality sectors. The Institute of Directors (IoD) described June’s inflation report as “mixed news” and said this Thursday’s wage data was likely to further influence MPC members.

The business group’s chief economist, Anna Leach, said: “Inflation is likely to rise slightly in the coming months, as energy price inflation picks up, reinforcing sticky services inflation. But all being well, inflation should moderate further out, supporting a downward trend in interest rates.”

Kevin Brown, savings specialist at Glasgow-based financial mutual Scottish Friendly, said that ongoing wage growth versus inflation suggested that the situation was getting better for many people.

“[Thursday’s] wage and employment data will be instructive on where we stand. If the labour market starts to show signs of real weakness then this could be the nudge that brings the [interest] rate cut to fruition.”

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