UK inflation holds steady in August, matching expectations

LONDON — U.K. inflation held steady during the month of August, data from the Office for National Statistics showed Wednesday, and matched analyst expectations.

The headline consumer price index (CPI) was in line with the previous 2.2% reading in July and also matched a prediction from a Reuters poll of economists. Headline CPI had come in at 2% in May and June, in line with the Bank of England's target rate.

Sterling rose 0.18% shortly after the release, trading at $1.3183 by 8:09 a.m. London time.

Services inflation — which is closely watched by the BOE, given its dominance within the U.K. economy and its reflection of domestically-generated price rises — rose to 5.6% in August from 5.2% in July.

Core inflation, excluding energy, food, alcohol and tobacco, came in at 3.6%, up from the 3.3% recorded in July.

Higher air fares were the largest contributor to upward price pressures, having risen from a lower base last year, the ONS said. Motor fuel, hotels and restaurants, meanwhile, saw the biggest declines.

BOE policymakers will meet on Thursday to give their latest monetary policy decision, with traders largely expecting the bank to hold rates steady.

Bets for a second consecutive 25 basis point cut had doubled to almost 40% earlier this week on the prospect of a more aggressive reduction in borrowing costs from the U.S. Federal Reserve, but tipped back to 28% following the print.

Richard Carter, head of fixed interest research at investment management firm Quilter Cheviot, said the fresh data had upped the likelihood of the Bank taking a more cautious approach.

"Despite recent data showing a stagnation in UK economic output and easing wage growth, core inflation remains sticky, with services inflation rising from 5.2% to 5.6%