Morning Brief – Data Update: UK Inflation

Data Update: UK Inflation

Mixed messages for the UK macro economy were received once again yesterday. As the July inflation figures were released, it was clear that there wasn’t going to be one decisive narrative that would emerge as to whether the reading was supportive or destructive to the view that inflation is cooling in the UK. Having seen UK inflationary pressures begin to come under control, the BoE and many people and businesses alike were hoping to see that theme continue within yesterday’s data. 

At the headline level, the data was encouraging: 6.8% aggregate inflation in July versus 7.9% in June. That brings the headline level of annual inflation to its lowest level since Q1 2022. Whilst an impressive fall, this figure wasn’t surprising given the 20% price fall in household energy prices in July. However, we know that the Bank of England and market are not just looking at headline inflation. Annual CPI inflation was known to fall due to changes in the price of consumer energy that we know took place during the data observation period. What has been more in focus has been the often-overlooked services component of inflation. As we have covered before, this measure often provides a truer reflection of domestic inflationary pressures. 

Contrary to the headline level of inflation, the prices level in service rose by 0.2% to a figure of 7.4% in July versus the prior month. Rising services inflation will secure the BoE’s expected September rate hike with a further hike still likely predicated upon August inflation data due to be released in one months’ time. Especially when taken in conjunction with the strong wage inflation data earlier this week, the market will continue to speculate over the size, not the possibility, of the BoE’s September hike.

Discussion and Analysis by Charles Porter

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