The inflation rate in the UK experienced a smaller increase than predicted by economists and the Bank of England, which lead to traders predicting a subsequent relaxation in interest rates. The Office for National Statistics reported a rise in the UK Consumer Prices Index of 2.2% in July, following a 2% increase in both prior months. Expectations had indicated a rise of 2.3%, contrasting with the Bank of England’s forecast of 2.4%.
Despite revealing the first rise in headline inflation of the year, a significant decrease in the growth of service and core prices might alleviate worries amongst policy makers that inflation is persisting. As a result, the sterling declined and investors predicted two quarter-point rate decreases this year.
KPMG UK’s chief economist, Yael Selfin, stated that the moderate change in inflation data could provide some reassurance for Monetary Policy Committee members, as the Bank’s own predictions earlier in the month suggested a steeper increase.
Traders enhanced predictions of a rate reduction by the Bank of England, pricing in an additional two quarter-point reductions by year-end. The pound declined to $1.2820, however, remains the top-performing currency of the G10 this year, primarily owing to the BOE keeping rates comparatively high.
Inflation in services, a measure the BOE uses to track domestic price pressure, decreased to 5.2% from 5.7%, which is its lowest level in over two years, and notably below the BOE’s forecast of 5.6%. Core inflation, excluding food and tobacco costs, has reached its lowest point since September 2021.
The UK’s efforts to curb inflation have taken longer compared to its G7 counterparts, but recent metrics indicate that it’s performing better than the euro area and on par with the US harmonized rate.
Andrew Bailey, Governor of the Bank of England, advised against decreasing borrowing costs too drastically or rapidly, which led to investors delaying predictions of the next move until November. However, confidence in a further move by December is growing.
The Bank of England (BOE) anticipates inflation in the UK will rise to nearly 3% later this year, after reaching the targeted 2% in May and June, before settling back down in 2025. The inflation spike in July was mainly attributable to a decrease in energy bills last year that are no longer factored into the yearly calculations.
The Office for National Statistics (ONS) noted that the inflation figures were most significantly impacted by the hospitality industry, including hotels and restaurants, leading to a dip in services inflation.
In specific reference to the entertainment sector, the numbers implied that the brief boost brought about by the ‘Taylor Swift’ effect started to fade after her ‘Eras’ tour left the UK. Prices in the live music scene and accommodations, which had previously pushed services inflation, contributed to its decline after the tour. Falling costs in air travels and package holidays also influenced the decrease in price growth in the UK’s biggest industry.
BOE policymakers are wary that persistent increases in services inflation and wage growth could present difficulties in accomplishing their sustainability objectives. Yet, the central bank has underscored that recent price hikes in services are largely due to variable elements.
The inflation report is part of this week’s critical data, which could potentially interrupt the BOE’s move towards lower interest rates.
Positive symbols were seen in the job market on Tuesday with an unexpected decrease in unemployment for the quarter up until June, due to businesses ramping up hiring. However, there were further declines in wage growth and job vacancies.
The GDP data due for release tomorrow is projected to reveal sustained growth in the second quarter, building on the recovery from last year’s economic contraction. The central bank has cautioned that a potent economy can contribute to inflationary pressures.