British consumer price inflation increased in July for the first time this year, according to official figures released on Wednesday. However, the rise was smaller than

anticipated, as services prices—closely monitored by the Bank of England—rose more slowly than expected.

The annual consumer price inflation rate climbed to 2.2% after two months at the Bank of England's 2% target, the Office for National Statistics reported. This was slightly below the median forecast of 2.3% in a Reuters poll of economists.

Following the release of the data, the British pound fell sharply against the U.S. dollar, and financial markets adjusted to reflect a 44% likelihood of a quarter-point interest rate cut by the Bank of England in September, up from 36% before the data was published.

Earlier this month, the Bank of England reduced interest rates from a 16-year high of 5.25%, indicating that May and June's 2% inflation readings likely represented a low point. The central bank had forecasted consumer price inflation (CPI) to rise to 2.4% in July and reach around 2.75% by the end of the year, as the impact of sharp declines in energy prices in 2023 diminishes, with inflation expected to return to 2% in the first half of 2026.

"Today's data will provide the Bank's Monetary Policy Committee with some confidence that domestic price pressures are less likely to derail a sustainable return to the 2% target," said Martin Sartorius, principal economist at the Confederation of British Industry.

British inflation had peaked at a 41-year high of 11.1% in October 2022, driven by surging energy and food prices following Russia's invasion of Ukraine, along with COVID-19-related labor shortages and supply chain disruptions. Photo by P L Chadwick, Wikimedia commons.