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UK Inflation Eases as Markets Consider BoE’s Next Move

Markets consider Bank of England's next move, Amazon Prime Day sees splurged US spending, held interest rates by RBNZ, and easing of UK Retail Price Index.

Oil prices slid during yesterday’s session as markets considered rising supplies and dampened demand. WTI fell close to 5% yesterday, with the subsequent fall this morning pushing prices below $69 dollars per barrel.

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.

US Retail Sales Beat Forecasts as Spending Surges Amazon Prime Day

Yesterday, US retail sales came in hotter-than-expected in another sign that the US economy remains resilient despite tighter monetary conditions. Against expectations of a 0.4% rise, retail sales grew 0.7% on a month-on-month basis for July. This represented the fourth consecutive monthly increase and is indicative of strong consumer demand despite the squeeze on household finances and borrowing rates being at their highest level since 2001. The 0.7% print represented a considerable increase from June’s figure of 0.3%.

Amazon Prime Day is being cited as a potential driver behind the rise in sales at nonstore retailers which increased 1.9%. This 48hour event saw exclusive deals released for Amazon Prime members between 11 and 12 July and according to Statista, Prime Day sales reached an estimated $12bn USD worldwide, representing the most successful shopping occasion in Amazon’s history. Here, some 375 million items were thought to have been purchased, an increase of around 75 million from 2022’s event.

RBNZ Hold Rates Again

This morning, the Reserve Bank of New Zealand held their interest rate for the second consecutive time, maintaining the official cash rate at 5.5%, and meeting market expectations. Since October 2021, the RBNZ’s has conducted 525bps of cumulative hikes and last month gave caution to the markets by indicating that further monetary tightening could be conducted as they try to bring inflation back down to their 1-3% target. Q2 figures indicate that inflation stood at 6% in, a slight easing from Q1 2023 figure of 6.7%, itself down from 7.2% in Q4 2022. It now appears that the central bank see that their official cash rate could be maintained throughout the whole of 2024, only seeing a cut in H1 2024.

RPI Drops to Lowest Level in 16 months

The UK’s Retail Price Index also eased, slipping to its lowest level in 16 months, hitting 9%. This marked a considerable slowdown from June’s figure of 10.7% but came in line with market forecast. On a month-on-month basis, RPI dropped 0.6%, slightly less than projected, but nonetheless following a 0.3% increase last month. The fall in RPI comes as PPI slipped 0.8% on an annualised basis as energy prices continued to fall.