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Market Analysis

UK inflation rises less than anticipated, increasing betting on rate cuts
Amos Simanungkalit · 6.4K Views

17

British consumer price inflation increased for the first time this year in July, according to official data released on Wednesday. However, the rise was smaller than anticipated, as the rate of increase in services prices—closely monitored by the Bank of England—was less pronounced.

The annual rate of consumer price inflation rose to 2.2% in July, up from two months at the Bank of England's 2% target, but falling slightly short of the 2.3% forecast by economists in a Reuters poll.

Following the release of the data, the British pound dropped significantly against the U.S. dollar. Financial markets now see a 44% chance of a quarter-point rate cut by the Bank of England in September, an increase from the 36% probability before the data was published.

Earlier this month, the Bank of England had reduced interest rates from a 16-year high of 5.25%, stating that the inflation readings of 2% in May and June likely marked the low point for inflation. The central bank had anticipated inflation would rise to 2.4% in July and approach 2.75% by the end of the year as the impact of the steep declines in energy prices from 2023 diminished, before eventually returning to 2% in the first half of 2026.

"Today's data should give the Bank's Monetary Policy Committee some confidence that domestic price pressures are less likely to disrupt a sustainable return to the 2% target," said Martin Sartorius, principal economist at the Confederation of British Industry.

British inflation reached a 41-year high of 11.1% in October 2022, driven by surges in energy and food prices following Russia's invasion of Ukraine, coupled with COVID-19-induced labor shortages and supply chain disruptions.

Currently, inflation in the UK remains lower than in the eurozone, where the European Central Bank cut rates in June, and in the U.S., where the Federal Reserve is expected to begin rate cuts next month.

Despite these trends, many households continue to feel the effects of the significant price increases over the past two years. Deputy Finance Minister Darren Jones remarked that the data highlighted the challenging economic legacy inherited by the newly elected Labour government, which would need to make tough decisions to improve the situation.

HOTEL COSTS FALL

The Bank of England is primarily focused on longer-term inflation pressures, including services prices and wages, as well as general labor market conditions. Data for July showed that annual services price inflation dropped to 5.2% from 5.7% in June, falling below all forecasts in a Reuters poll and reaching its lowest level since June 2022. The Bank of England's forecast was a decrease to 5.6%.

This decline in services price inflation was influenced by a reduction in the cost of hotels, as well as decreases in airfares, roadside recovery services, package holidays, and cultural services such as live music. While some economists linked June's price hikes to high-profile concert tours, including U.S. singer Taylor Swift's, the Office for National Statistics noted that a direct correlation could not be confirmed.

Data released on Tuesday indicated that annual wage growth excluding bonuses slowed to its lowest level in nearly two years at 5.4%, consistent with forecasts but still nearly double the rate the Bank of England considers compatible with a 2% CPI target.

Additionally, the data showed an unexpected drop in unemployment, although this figure is based on a survey undergoing revisions. Economists suggest the Bank of England will remain cautious about rate cuts, despite the recent inflation data.

"Unless there is a significant shock to growth, the rate-cutting cycle is likely to proceed gradually, with cuts occurring quarterly. Investors expecting imminent rate reductions may be disappointed," said Aaron Hussein, global market strategist at J.P. Morgan Asset Management.

Financial markets now anticipate a further 0.49 percentage points of rate cuts by the Bank of England over the remainder of the year, up from the 0.46 percentage points projected before the data was released.

 

 

 

Paraphrasing text from "Reuters" all rights reserved by the original author.

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