If you look at UK CPI by component, September 2026 tells two very different stories. Goods prices rose just 0.2% year-on-year — close to flat, down from more than 14% at the peak in late 2022. Services prices rose 5.6% — barely changed from a year ago, and still running nearly three times the Bank of England's 2% target.
Why services inflation is different
Services — restaurants, haircuts, hotel stays, insurance, education — are predominantly labour-intensive. Unlike manufactured goods, they cannot be imported from low-wage economies. When wage growth is strong, service providers face higher costs and pass them on through higher prices. According to the ONS Labour Force Survey, average weekly earnings growth (excluding bonuses) was running at 5.3% in the three months to August 2026. That is well above the level consistent with 2% services inflation, which historically requires wage growth in the 3–3.5% range.
The goods cycle has already played out
Goods inflation peaked and fell rapidly because it was driven by supply-chain disruptions and energy costs — both of which have normalised. The New York Fed's Global Supply Chain Pressure Index returned to neutral in mid-2023 and has stayed there. Global shipping costs, energy prices, and semiconductor availability are no longer adding to price pressures. Goods prices tend to respond within months to these inputs; services prices can lag by a year or more.
What the Bank of England is watching
The Bank of England's Monetary Policy Committee has flagged private-sector regular pay growth as its key leading indicator. The August 2026 MPC minutes noted that the committee needed to see "sustained evidence of cooling in services inflation and wage growth" before reducing Bank Rate below 4.5%. The Bank publishes its quarterly Monetary Policy Report in November 2026, which will contain updated projections.
The IMF's October 2026 World Economic Outlook projects UK CPI at 2.8% for 2026 and 2.2% for 2027, implying services inflation should continue to ease through 2027 as wage growth moderates — but the timeline is uncertain.