This morning’s UK inflation figures showed headline CPI remaining at 2.2% YoY in August, for the second month in a row, as price pressures continue to bump along just north of the BoE’s target, as had been expected to occur in the second half of the year.
That said, there are lingering signs of inflation persistence within the economy, as the core CPI metric ticked higher to 3.6% YoY, while the services CPI figure rose to 5.6% YoY, notching an MoM increase for the first time since January.
It should be noted, however, that a significant degree of this increase in the underlying inflation gauges owes to statistical base effects, stemming from last August’s sharp decline in airfare and hotel prices, which was not repeated this year.
A ‘Taylor Swift effect’ may also be having an impact, at the margin, although the impact of August’s concerts is likely more localised than that seen earlier in the year.
Furthermore, it’s important to consider that, despite being a touch hotter, the figures are still better than the most recent round of MPC forecasts, which saw headline inflation at 2.4% in August, and services inflation rising to 5.8% YoY. ‘Could be worse’ springs to mind.
The policy implications of today’s release, however, are likely to be minimal.
The MPC are all-but-certain to hold Bank Rate steady tomorrow, in what is likely to be an 8-1 vote among policymakers.
Having set a relatively high bar for further cuts at the August meeting, my base case remains that the next Bank Rate reduction will come in November, with quarterly 25bp cuts to follow from there onwards.
While, of course, there is plenty of data to be released between now and then, today’s figures may at least give the MPC’s hawks some pause for though, while also evidencing that the Bank’s continued caution, and focus on signs of underlying inflation persistence, is indeed warranted.
