UK Inflation Holds Firm

Figures released this morning indicate that UK inflation held firm throughout June, with headline CPI at 2%.

This broadly came in line with market expectations and follows May’s print which marked the first time that inflation had fallen back in line with the Bank of England’s target since July 2021.

On a monthly basis prices rose 0.1% between May and June, marking a considerable slowdown from the previous month’s figures. Here, increases in the price of petrol (which rose 3 pence per little) and transport were offset by clothing and footwear.

This came as food price inflation also fell to its lowest level since October 2021, a far cry from the recent high of 19.1% recorded in March 2023.

When excluding the volatile components of food and energy, core inflation also met market expectations, coming in at 3.5%. Much like last month, given that this is 1.5 percentage points above CPI, the print indicates how services inflation will continue to cause a headache for policy makers given how ‘sticky’ it is proving.

Service inflation also remained considerably high at 5.7%, unchanged from May, though 10bps higher than expectation.

With inflation holding firm, money markets are pricing in around a 36% chance of an August cut during yesterday’s session, and 78% chance of a cut by September.

Attention now turns to the BoE’s monetary policy committee meeting on 1 August.

Sticking with monetary policy, tomorrow all eyes will be on Frankfurt as markets look towards the ECB’s interest rate decision and subsequent commentary for forward guidance.

With their main refinancing rate at 4.25%, and their marginal lending facility and deposit facility at 4.5% and 3.75%, respectively, the ECB is widely expected to hold tomorrow. This comes as markets price in around an 85% chance of the next 25bps cut by September.

In June, the ECB met market expectations in conducting their rate cut since 2016. This follows nine consecutive months of rates being held at their highest level since the currency union’s inception, in a move which was indicative of how Frankfurt saw their fight against inflation as entering a new stage.

The ECB continue to tread a precarious tightrope in relation to monetary policy. On the one hand, with unemployment close to record lows, wage growth continues to remain relatively high at 5%, as does service price inflation at 4%. On the other hand, growth continues to be a major cause for concern for Doves, who point to a 0.1% contraction in GDP over Q4 and marginal expansion of just 0.3% over Q1 2024.

Yesterday, the International Monetary Fund upwardly revised their growth forecast for the UK economy, forecasting growth of 0.7% this year and 1.5% over 2025.

With the IMF forecasting 1.3% growth for Germany and France next year, economists at the Washington, D.C based organisation expect UK growth to outpace all other major European economies.

UK economic growth is not however expected to outpace that of the US or Canada, with expansions of 1.8 and 2.4% forecasted in the North American economies, respectively.

Looking more generally at global growth, the IMF kept forecasts unchanged for output over 2024 and 2025. Here, the fund expects global growth this year to be 3.2%, before rising marginally to 3.3% next year.

Economist said that “varied momentum in activity at the turn of the year has somewhat narrowed the output divergence across economies as cyclical factors wane and activity becomes better aligned with its potential”.

Nevertheless, they outlined that “Services price inflation is holding up progress on disinflation, which is complicating monetary policy normalization”.

Attention now turns to the string of central bank meetings, with one eye being firmly kept on the global geopolitical environment…as well as recent developments in the US election.