UK inflation rose less than expected in July, further supporting a September cut to Bank Rate after yesterday’s mixed set of labour market prints.
Headline price growth rebounded to 2.2% last month, up from 2.0% in June, largely due to energy base effects. More importantly, today’s reading was below the 2.3% expected by markets, as cooling elsewhere in the consumption basket weighed on aggregate price growth. This was particularly true of services inflation, which broke a run of five straight expectation overshoots, softening to 5.2% YoY last month.
The upshot is that price growth is now tracking below BoE forecasts, having proven notably sticky over recent releases, with market expectations for September easing now just shy of 50% post-release.
As expected, energy prices had a notable impact on overall inflation last month, falling by -10.9% YoY in July. While still a drag on price growth, this was a smaller fall than the -16.0% in June, with resets to the Ofgem price cap seeing a reduced impact on the annual inflation reading. The net result was a modest 0.2pp rebound in headline inflation, helped at the margin by food alcohol, and tobacco prices which also surprised to the upside last month. More interestingly, this still left inflation tracking 0.2pp below the Bank of England’s 2.4% July inflation forecast. Stripping out these volatile components tells a similar story too.
Core inflation fell from 3.5% YoY to 3.3% in July, below economist consensus that had expected a 3.4% print.
Looking through the details of the July inflation report, the surprise weakness was almost entirely attributable to accommodation services and airfares. The first of these alone contributed -0.2pp to headline inflation, more than reversing the large positive impact seen in the June figures. Airfares, meanwhile, also had a modest negative impact last month, helped by the early timing of the survey date, which fell before the start of the summer holidays this year. Together, these two components explain most of the drop in services inflation, from 5.7% YoY in June, to 5.2% in this latest set of readings.
For context, Bank staff had expected services prices to rise by 5.6% YoY last month, followed by an increase to 5.8% in August, before falling to 5.3% at year-end.
Admittedly, we do expect to see a rebound in both accommodation services and airfares next month. Accommodation costs in particular are a risk given the resumption of Taylor Swift’s Eras tour, with London dates scheduled between the 15th and 20th of August. As such, while the disinflation progress seen in the July figures is likely to be welcomed by the MPC, with one more set of wage and inflation prints due before the MPC delivers its September rate decision, this week’s data is unlikely to be conclusive for policymakers. Nevertheless, we are still inclined to think that these latest figures help support the MPC’s argument that inflation pressures are gradually easing, opening the door for further rate cuts. All in all, we think a September rate cut remains an underpriced scenario, though markets are increasingly aligning with our view. Swap market-implied odds of a rate cut next month have risen from 35% to 47% this morning.