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© Reuters. UK inflation numbers will need to plunge to move Bank of England dial
Proactive Investors - A lot hinges on Wednesday's UK inflation data, which is expected to show another sizeable easing in the consumer price index (CPI) and help the Bank of England decide how much further it wants to hike interest rates.
The current forecast is for headline CPI inflation to soften to 6.7% for July, after falling from 8.7% in May to 7.9% in June. Core CPI, which excludes food and fuel, are expected to be stickier at 6.8%, from 6.9% in June and a 31-year high of 7.1% in May.
However, the latest jobs numbers, released earlier today, showed wage growth strengthening to 7.8% in the year to June, close to overtaking CPI, which softened to 7.9% in the figures published a month ago.
This is good news for households, which have had to contend with negative wage growth for a year and a half, but not for the BoE's monetary policy committee (MPC), which has been raising interest rates to try and contend with high inflation.
Today's labour force figures included the regular measure of private sector regular pay growth, which has been identified by the MPC as a key leading indicator for how persistent inflation is going to be.
The bad news for the MPC was that numbers showed growth of 8.2%, up from 7.7% in May that BoE staff forecasts from earlier this month predicted was going to be the peak, with a fall to 7.6% having been their expectation for today.
Overall, it reignited fears that inflation could remain higher for longer.
Markets quickly raised expectations for peak interest rates to 6% from 5.75% last week and economists said it pretty much cemented another hike to at least 5.5% next month.
Interestingly though, stubbornly high wage growth is being coupled with "unmistakable signs" that the jobs market is cooling rapidly, said economist James Smith at ING.
This included an increase in the unemployment rate to 4.2%, along with apparent weakening in hiring and ongoing improvement in worker supply.
But the MPC will remain focused on wages, said Smith, and when it comes to tomorrow’s CPI figures, he thinks there’s "some scope for a positive surprise on services inflation, but ultimately a September rate hike still looks nailed-on".
November's policy meeting is "more of a question mark", he said, not least because many believe wage growth is likely to slow gradually.
Martin Beck, chief economic advisor to the EY ITEM Club, agreed that a rate rise in September "looks very likely"... "short of a major downside surprise in tomorrow's inflation data".
But he said the club thinks the loosening in labour market conditions "should mean that's the final rate increase of this cycle".
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