How ‘pub meal’ inflation has dented hopes for a UK interest rate cut

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Inflation may have fallen to its lowest level in three years, but anyone paying for services – from a pub meal to a hotel stay – is still facing prices rising faster than expected.

Although food and energy price inflation have cooled, an analysis of official data released on Wednesday shows consumers are still facing spending pressures ahead of the general election.

Services inflation is also a key indicator of underlying price pressures for the Bank of England when considering interest rate decisions. Services price growth was higher than forecast by the BoE in its May monetary policy report and above analyst expectations.

“The big problem at the moment is that service prices are still rising rapidly,” said Thomas Pugh, economist at consultancy group RSM UK.

Britons paid an average of more than £124 for a night in a hotel in May, which is 12 per cent more than the same month last year and 48 per cent higher than in May 2019, before the pandemic, according to detailed data published by the UK Office for National Statistics.

Similarly, the cost of a range of services – a hot meal in the pub, a main course in a restaurant, babysitting fees, fish and chip takeaways, theater tickets, pool tickets or car services – rose between 6 and 11 percent. with the highest prices since detailed registration began in 2018.

The figures show that households continue to face high prices, which are still rising rapidly in many services sectors, despite headline inflation falling to the BoE’s target of 2 percent for the first time in three years.

The fall in headline inflation was welcomed by Rishi Sunak’s Conservative party, which is trailing Labor by around 20 points in the polls and had made cutting inflation one of its key pre-election promises. However, Rachel Reeves, Labour’s shadow chancellor, said working people were still “worse off”.

Chris Hare, an economist at HSBC, said there was “broad-based persistence” in the figures, despite swings including a 14.9 percent monthly increase in volatile airfares.

With the BoE widely expected to keep interest rates at 5.25 percent on Thursday, Hare said “momentum in wage and services inflation will likely need to show clear signs of easing in the coming months” before a cut can be considered.

There are several reasons why services inflation remains stubbornly high, including the rising costs of broadband or mobile phone contracts, which are updated annually in the spring.

Companies also pass on higher wages through prices, which is more important in the labor-intensive service sector. The national living wage rose by 9.7 percent in April, and overall regular wage growth was still 6 percent in the three months to April.

Services inflation rose at an annual rate of 5.7 percent in May, which is worryingly high for policymakers, even though it was marginally lower than the 5.9 percent in the previous month. The price of accommodation services increased by 7 percent annually, and the cost of package holidays increased by 9 percent.

Although wages are now rising faster than inflation, real incomes remain largely unchanged from the end of 2020, while overall consumer prices are still up 21 percent from May 2021.

As a result, consumers “couldn’t have felt better off,” said Paula Bejarano Carbo, an economist at the National Institute of Economic and Social Research. “Households are still feeling the blow of the post-crisis increase in price levels,” she added.

Energy prices, for many foods and goods, have fallen from their peaks. For example, cheddar cheese cost £8.78 per kilo in May, compared to £9.65 in May last year, while prices fell for frozen prawns and fresh salmon, milk, butter, cereals, pasta, chicken breast and baked beans.

The prices of furniture, household appliances and tableware have all fallen compared to last year. Overall goods prices fell by 1.3 year on year in May, the second month of deflation, reaching their lowest level since 2016, while food inflation eased to 1.6 percent last month, following a 45-year high reached in March 2023 reaches.

This is because lower energy prices are rippling through the supply chain and demand for goods has weakened after the pandemic-induced peak. Due to low demand, “retailers have recently been forced to cut prices,” says Pugh of RSM UK.

However, overall food prices are still 30 percent higher than in May 2021, before they soared following Russia’s invasion of Ukraine. Although declining year on year, energy and goods prices have increased by 40 percent and 21 percent respectively since May 2021.

James Smith, research director at the Resolution Foundation, said: “The legacy of a long period of very high inflation means that families are unlikely to feel good as they continue to struggle with the higher costs of essentials.”