This morning’s UK inflation data showed an unsurprising uptick in headline inflation in June, with CPI rising to 2.2% YoY, back above the BoE’s 2% target, though this rise can largely be attributed to base effects from energy prices which, despite notching a chunky decline in July, did not decline as much as in 2023.
Nevertheless, such a rise was below both market expectations, and the BoE’s own 2.4% forecast.
Digging into the data, underlying inflationary pressures showed further signs of easing. Core prices (excluding food and energy) rose by 3.3% YoY, the slowest pace since September 2021, while services CPI – a component which policymakers have paid close attention to this cycle – rose 5.2% on an annual basis, the slowest pace since June 2022, and considerably below the BoE’s 5.6% forecast.
The easing in both core and services inflation metrics should provide policymakers with some degree of reassurance that progress is being made in stamping out persistent price pressures within the economy, while the decline also owes to the fading of some one-off rises in accommodation prices, perhaps due to the impacts of Taylor Swift’s tour, observed in the June release.
Nevertheless, while this morning’s figures are likely to be welcomed on Threadneedle Street, despite the uptick in headline prices, they are unlikely to significantly alter the BoE’s future policy path, with the divided MPC likely to plot a slow, steady, and gradual course towards further policy normalisation over the remainder of the year, particularly with services inflation remaining elevated, despite the recent cooling.
As one swallow doesn’t make a summer, one promising inflation reading shan’t see the BoE suddenly stamp down on the accelerator pedal when it comes to cutting Bank Rate.
Hence, my base case remains just one more Bank Rate cut this year, likely in November, particularly with four of the MPC’s more hawkish members not yet convinced that a cut is warranted, and likely seeking further data to show that July’s easing in underlying inflationary pressures shan’t prove to be a one-off.
Money markets continue to discount around 46bp of easing by year-end, a pace punchier than that likely to be delivered by policymakers, who set a relatively high bar to further easing at the August MPC. The potential hawkish repricing as some of this degree of cuts comes out of the curve could provide support for the GBP over the medium-term.
