Services inflation is a key indicator of underlying pressures in the economy because prices in the sector are closely linked to pay.
Andrew Bailey, the Bank’s Governor, has repeatedly referred to it as a key metric for policymakers in determining when to cut rates. Services inflation remained at 5.7pc in the year to June, against expectations for a slight fall.
Restaurants, hotels, rents and housing costs all drove the rate higher last month. And it wasn’t all down to Taylor Swift. Economists had warned the megastar’s seven UK concerts in June could drive a temporary boost in hotel prices that would not be sustained in the coming months.
However, Paul Dales, the chief UK economist at Capital Economics, said “only a small part” of the rise in services could be blamed on the temporary effects of her concerts. Just two of her Edinburgh concerts were captured by June’s figures.
He said: “They may have been behind some of the large rise in hotels inflation from 7.0pc to 9.8pc. But cultural services inflation, which would capture any influence from the ticket prices, dipped from 7.4pc to 7.3pc. As a result, it’s not obvious that the Bank of England can ignore a chunk of the stickiness of services inflation.”
Rob Wood, the chief UK economist at Pantheon Macroeconomics, said measures that strip out some of the most volatile components of services prices also remained stubbornly high.
He said: “The Monetary Policy Committee that sets rates has referenced at least three measures of underlying services prices. Their latest definition used in the May Monetary Policy Report, services excluding airfares, package holidays, rents and education, rose by 7.5pc on a seasonally adjusted three-month-on-three-month basis, up from May’s 6.7pc gain and the strongest since July 2023.”
It comes a day after the International Monetary Fund warned that the Bank may have to keep interest rates higher for longer because of high services prices and “brisk” wage growth in many advanced economies. It said this had resulted in the prices of services such as haircuts and hotel stays rising much faster than goods.