Inflation remained steady at 2.2 per cent in the year to August, the Office for National Statistics (ONS) has revealed, leaving the Bank of England (BoE) with a ‘headache’ on whether to reduce interest rates.

While the headline inflation rate remained at 2.2 per cent, core inflation rose by 0.3 percentage points to 3.6 per cent and wage growth increased from 5.2 per cent to 5.6 per cent.

“The latest inflation data delivered another headache for the BoE’s rate setters,” said Fidelity International investment director, Tom Stevenson.

“The mixed messages in today’s inflation data underline the challenge the BoE faces in setting monetary policy in a less stable and predictable environment for prices.

“With the new Labour government pushing for higher growth and productivity, and without the stabilising forces of globalisation, cheap energy and EU membership, inflation is likely to be more volatile in future.”

However, Stevenson argued that the direction of travel for UK interest rates looked set, even if the timing of rate cuts was not.

“With growth stagnating over the summer and headline inflation remaining close to target, the next cut looks nailed on for November, even if it does not come tomorrow,” he continued.

“That should keep a lid on the pound, whether the Federal Reserve opts for the expected quarter point rate cut this week or the jumbo half point cut that remains a possibility.

“For investors, the window of opportunity to lock in higher interest rates on cash is starting to close.”

Killik & Co partner, Rachel Winter, added that while the headline rate of inflation had stayed the same, the BoE would be disappointed by the higher core inflation figure.

She stated that this could put a September interest rate cut out of reach, and made the case for future rate cuts this side of Christmas more difficult.

"For investors, as uncertainty around future rates lingers, the importance of maintaining a well-diversified portfolio across multiple asset classes remains,” Winter said.

“Short-term volatility is a concern as we approach Labour’s first Budget, and diversification will help to protect against sector-specific shocks.”

Meanwhile, Evelyn Partners chief investment strategist, Daniel Casali, stated that while core inflation rose in August, the broad downward trend in lower UK CPI inflation was intact, which could allow the BoE to cut interest rates over the coming months.

“However, given that services CPI inflation remains elevated at 5.6 per cent year-over-year and economic growth has picked-up in the first half of 2024, the BoE will probably take a cautious approach in loosening unless there is significant belt tightening coming after the Budget on 30 October that dampens growth expectations,” he continued.

“The broader trend of lower UK inflation should encourage the BoE to cut interest rates this year, but at a relatively slower pace compared to the US. Potentially, this should provide upside for the sterling exchange rate against the US dollar.

“Gold will continue to benefit from broad-based weakening in the greenback and secular bullion demand from central banks in emerging economies. Gold also provides some diversification qualities in portfolios to boot.”

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