Inflation Eases as Markets Consider BoE’s Next Move

Low inflation levels, surprise Spanish elections, and easing of food inflation.

This morning, data from the ONS showed that UK headline inflation has slowed to its lowest level since March 2022. This came as the figure hit 7.9%, missing expectations of 8.3% and marking a considerable slowdown from last month’s print of 8.7%. This also represents a significant slowdown from last October’s 11.1% print, which represented the highest level of inflation in over three decades. The fall in headline inflation over June was primarily driven by easing fuel costs, as wholesale energy prices continued to retreat.

Core inflation also slipped to 6.9% on an annualised basis, falling 0.2 percentage points from last month’s print. June’s slowdown follows May’s figure which showed core inflation rising 30bps as the index hit its highest level since 1992. Given that this figure strips away the volatile indexes of food and energy, economists have continued to assess how this is indicative of the prevalence of ‘sticky’ inflation – which is harder to bring down. As such, while core inflation has

eased, it nonetheless remains close to historic highs and therefore continued to cause a further headache for Threadneedle Street, Westminster, and the UK’s 22 million households.

The easing of inflation has seen money markets downwardly revise their rate hike expectations from the Bank of England. As such, the implied terminal rate is now below 6% – a sharp downward revision from when markets were forecasting a terminal rate of around 6.5%. Money markets have however continued to fully price in a 25bps rate hike, though the jury is out on whether Threadneedle Street may opt for a 50bps hike, to bring the BoE’s benchmark policy rate to 5.5%. As such, all eyes are on Threadneedle Street at 12-noon on 8 August where the Bank of England will make their latest interest rate announcement and provide monetary guidance.

Eyes Turn to Spanish Elections

Spain goes to the polls this weekend in a somewhat bizarre and pretty interesting election: The surprise election was called by the current PM after his party was hammered in local elections back in May. The snap election calling was a tactic to stop opposition parties continuing their calls and deriding the government who is on the back foot following the local elections – it also gives the opposition parties less time to work out their differences and try to narrow the gap between their messaging, in a bid to get on the front foot for creating a coalition. This tactic, PM Sanchez hopes, will be enough to keep a right/far right coalition of the Partido Popular / Vox parties from happening. According to polls though, this is the most likely outcome, with the two parties taking 1st and 3rd place and collectively having enough seats to form a two-party majority. One interesting curveball though is the weather…Spain has been caught in the prolonged heatwave that most of Europe has been suffering and this won’t fare well for a party that isn’t a firm believer in climate change, such as Vox. Temperatures are set to drop by the weekend, so we don’t necessarily see it impacting turnout, but it could influence the vote. From a wider European perspective, Spain going right wing could cause an issue for the establishment, particularly as Italy is already on that side of the spectrum and therefore the populist voice on the continent would grow louder. We’ll have to wait and see…

Food Inflation Eases

Following yesterday’s comments from Ocado’s CEO that the country is ‘over the worst’ of food price inflation, the ONS’s food price index has further eased – though remaining close to record highs. Here the ONS stated that “food price inflation eased slightly this month, although it remains at very high levels”. While the rate of food inflation shows signs of slowing down, it nonetheless remains historically high at 17.3% – just down from March’s figure of 19.2% which represented the highest level in 45 years. The ONS’ print follows Kantar’s grocery price inflation index easing for a fourth consecutive month in July and brings hope that pressures may ease on household budgets as the cost of living continues to bite.