CPI inflation remained static at 3.8% in August, in line with market expectations but below the Bank of England's upwardly revised and anticipated 4.0% peak.
Even more positively, core inflation came in at 3.6% in the 12 months to August, down from the 3.8% in July.
The Bank of England expects inflation to peak at around 4% in September, before gradually falling back to its 2% target.
Industry experts are now divided on when the next cut to Bank Rate will come, with some believing inflation has reached its peak and others expecting the Bank of England to maintain its 'hawkish' stance.
Ian Stewart, chief economist at Deloitte, said: “The worst of the inflation surge is probably behind us, with the inflation rate likely to edge lower over the coming months. Together with a softening labour market, easing inflationary pressures should allow the Bank of England to make a final 25bp rate cut by the end of this year.”
John Phillips, CEO of Just Mortgages and Spicerhaart, agreed: “Inflation holding steady will have certainly caught many by surprise, as the general consensus was we would see inflation reach double the Bank of England’s target. While this is unexpected and certainly positive news, I still don’t think I’d be planning a rate cutting party for tomorrow. But what it could mean is far better odds for a change in November which had recently seemed off the cards."
Rob Morgan, chief investment analyst at Charles Stanley, commented: "For the Bank of England, sticky inflation presents a policy dilemma. It’s now clear the UK has a unique inflationary problem compared with other developed nations, partly thanks to high energy costs, and some Monetary Policy Committee (MPC) members remain concerned about second-round effects. This is where prolonged inflation above the 2% target risks embedding higher price expectations into consumer behaviour and business decisions, creating a self-fulfilling feedback loop.
"The inflation outlook has triggered a tug-of-war within Threadneedle Street. Some MPC members argue that signs of weakening demand and softening price pressures justify another rate cut before year-end — continuing the Bank’s “gradual and careful” easing cycle.
"However, the persistence of elevated inflation complicates that narrative. With the September CPI print likely to remain well above target – potentially double – a majority of the committee may opt to hold rates steady at the November meeting. Meanwhile, GDP growth, though tepid at 1.4% year-on-year, hasn’t slowed enough to confirm a decisive disinflationary trend.
"Some policymakers may also prefer to wait for greater clarity on the fiscal outlook from the upcoming Budget before committing to further easing. This implies no reduction until December at the earliest."
Jeremy Batstone-Carr, European strategist at Raymond James Investment Services, added: “It is hard to imagine rate-setters lowering the base rate tomorrow against a backdrop of still rising consumer prices, yet the doves on the deeply divided Monetary Policy Committee (MPC) continue to argue that today’s increased prices largely reflect higher wages and large temporary hikes in regulated prices, such as water rates.
"The hawks are less convinced and are likely to argue that rising price pressures, which are expected to peak this month, coupled with growing dissatisfaction over efforts aimed at curbing inflation, risk sending the wrong signal by cutting rates now.
“With September’s CPI inflation report not available until late October, the likely further increase in September’s consumer prices and proximity of the Autumn Budget make it unlikely that the Bank will move again on 6th November. Whether the Committee provides further support for hard-pressed households and businesses through another rate cut immediately ahead of the peak festive season in mid-December may depend largely on the outlook for wage growth.”
Kevin Brown, savings expert at Scottish Friendly, was more pessimistic, stating: "While inflation is no longer rising, it doesn’t make another rate cut any likelier this year. The Monetary Policy Committee has been insistent that it will proceed cautiously on future rate cuts, with policymakers wary of another price spiral if they move too soon.
"Realistically, we won’t see the next cut until March or April next year now, which will come as a blow to borrowers holding out for a further reduction in borrowing costs before switching to a new mortgage rate."
