UK Inflation Eases as Markets Consider BoE’s Next Move

This morning’s data from the ONS shows UK headline inflation for July easing to 6.8% on an annualised basis, in line with market expectations. The figure represents a 1.1 percentage point decrease from June’s figure and marks the lowest rate of inflation since February 2022. The drop in headline inflation comes as fuel prices eased across the board, with fuel and lubricants costs slipping just under 25% from a year ago. Inflationary pressures on food and non-alcoholic beverages also eased, with the rate of acceleration slowing from 17.3% to 14.8%.

Meanwhile, the UK’s core inflation index which strips out the often-volatile food and energy components, remained unchanged from June’s figure, hitting 6.9%. This came slightly above the general market consensus’ projection of a 6.8% print and demonstrates the prevalence of ‘sticky’ inflation, as the Bank of England tries to bring it back down to its 2% target level.

Given the dominance of services to the UK economy, markets will be hotly anticipating any rhetoric from the Bank of England on the topic of sticky inflation and its implications on monetary policy, ahead of the BoE next MPC meeting on 21 September. Nevertheless, this

morning’s print has seen a muted response to money markets’ implied rate hike expectations. Markets continue to fully price in a 25bps rate hike for 21 September with a terminal rate of just under 6% being forecasts Q1 2024. Earlier this month, the Bank of England met expectations by raising rates 25bps to bring the benchmark policy rate to 5.25%. Their latest decision marked the 14th consecutive rate hike and brings borrowing rates to fresh 2008 highs. Hence, with some looking towards a terminal rate of 6%, this suggests that Threadneedle Street could hike by 25bps three more times.

Notwithstanding the prevalence of service inflation, policy makers may be taking a sigh of relief given that this morning’s inflation data comes on the back end of yesterday’s hot labour market data which showed UK wage growth rising to record highs. Here, average wages excluding bonuses grew 7.8% on an annualised basis in the three months up to June raising concerns that the labour market will continue to feed into inflationary pressures.