British inflation missed forecasts for a slight dip and remained at 2% in June while strong underlying price pressures prompted investors to reduce expectations that the Bank of England will cut interest rates within two weeks for the first time since 2020.
A rise in hotel prices in a month when US pop star Taylor Swift and other entertainers toured the UK was partly seen as a factor in the higher-than-expected jump in inflation figures, underscoring the BoE's concerns about the price of services.
At the same time core inflation is also higher and the BoE may not be able to breathe a sigh of relief from these latest figures.
"If a rate cut in August was 'ambiguous' before this data, it's even more uncertain now," said Cathal Kennedy, senior UK economist at RBC Capital Markets.
Economists polled by Reuters mostly expected core consumer price inflation to ease to 1.9% in the 12 months to June, continuing its decline from a peak of 11.1% in October 2022.
Inflation for services was 5.7%, according to the Office for National Statistics, unchanged from May. A Reuters poll had shown a slightly weaker increase of 5.6%.
Investors cut bets on a BoE rate cut on August 1, the date of the next monetary policy announcement, to about 35%, down from just under 50% before the data was released.
The pound hit a near two-year high against the euro and around a one-year high against the US dollar, rising above $1.30.
The BoE was relieved that consumer price inflation fell in May to the 2% target for the first time in almost three years. But it has expressed concern about a surge in services inflation, which largely reflects pressure from wage growth in a labor market that lacks candidates to fill jobs.
Core inflation excluding volatile food and energy prices remained at 3.5% in the 12 months to June, the ONS reported, matching the median forecast in a Reuters poll.
The BoE had expected core inflation of 2.0% in June and services inflation of 5.1%, according to forecasts published two months ago. The BoE also expects headline inflation to rise back above its target later this year and throughout 2025.
