‘Taylor Swift effect’ blamed for UK inflation standing at 2% in June

Chances of an interest rate cut in August have suffered a blow after higher hotel prices – blamed by some analysts on a “Taylor Swift effect” – signaled progress in the UK’s fight against stalled inflation last month .

The government’s preferred measure of the cost of living remained at its target of 2% for the second month in a row in June.

Sharp falls in clothing prices as retailers sought to offload summer stocks were offset by the rising cost of hotel stays, the Office for National Statistics (ONS) said.

Other key price measures also showed no improvement in June. Core inflation – which excludes food, energy, alcoholic beverages and tobacco – was unchanged at 3.5%. Inflation in the services sector – closely tracked by the Bank of England – remained steady at 5.7%.

Hotel prices rose 8.8% annually in June compared with a much smaller increase of 1.7% a year earlier. Analysts suggested the jump was partly driven by demand for stays around the eight UK dates of Taylor Swift’s Eras global tour.

Paul Dales of Capital Economics said: “Although CPI inflation stayed exactly in line with the 2.0% target in June – it is the stability of services inflation at 5.7% that is the blow. And it looks like only a small part of this may have been due to the temporary effects of the Taylor Swift concerts. As a result, the chances of an interest rate cut in August have diminished somewhat more.â€

Inflation figures for June will be the last before the Bank of England decides on August 1 whether to cut interest rates – which stand at 5.25% – for the first time in a year. Financial markets cut their forecasts for the likelihood of a cut in August from a 50% chance to 35% on Wednesday after the release of the ONS data.

Luke Bartholomew, deputy chief economist at fund manager Abrdn, said: “Today’s inflation report will keep the Bank of England’s August rate decision on a knife edge.” The strength of rising hotel prices suggests a Taylor Swift effect on prices, but policymakers will almost certainly be looking at this kind of dynamic.

Although the consensus in financial markets had been for a fall to 1.9% last month, as measured by the consumer price index (CPI), the ONS said inflation was still at the joint lowest level in almost three years. Annual cost of living growth was last lower in April 2021, when it was 1.5%.

Prices overall rose 0.1% last month, matching the increase in the same month in 2023. Food price inflation continued to ease, falling from 1.7% to 1.5%, while clothing and footwear prices rose by 1.6% in the year to June compared with 3% in the year to May. Hotel and restaurant inflation increased from 5.8% to 6.3%.

Threadneedle Street rate-setters on its nine-member monetary policy committee expect inflation to rise to 2.5% in the second half of 2024 before falling below the official 2% target.

ONS chief economist Grant Fitzner said: “Hotel prices rose strongly while used car costs fell, but by less than this time last year. However, these were offset by falling clothing prices, with widespread sales reducing their cost

Darren Jones, chief secretary to the Treasury, said: “It is welcome that inflation is on target, but we know that for households across Britain prices remain high. We face the legacy of 14 years of economic chaos and irresponsibility. This is why this government is taking the hard decisions now to fix the foundations so we can rebuild Britain and make every part of Britain better.

George Dibb, associate director for economic policy at the left-leaning think tank IPPR, said: “Today’s data confirms that inflation is on track to normalize. Some drivers of inflation, such as core inflation, are still elevated, but The Bank of England’s policy stance remains very tight. Interest rates have been too high for too long and need to come down to avoid stifling growth.â€