With June’s UK CPI reaching 3.6% and core inflation remaining stubbornly high, wealth managers face a complex monetary outlook. Market strategists warn that the Bank of England’s expected rate cuts may be delayed as inflationary pressures from national insurance, shipping, and energy costs persist, raising the risk of stagflation just as growth falters.
Sharing her analysis, Lindsay James, investment strategist at Quilter said: “Despite last night’s Mansion House speech and the desire to kickstart growth in the economy, Labour is left waking up to headlines of inflation rising again. The Consumer Price Index hit 3.6% in June, up from 3.4% the month prior, and is showing little sign of coming back down to the 2% target soon. This ramps up pressure on the government to find some wins when it comes to economic growth and making the country feel like they are better off under this administration.
“It seems we are now seeing the effects of the rise in employer national insurance contributions feeding through into prices, along with increased shipping costs hitting too. Groceries, for example, have been higher in June as a result of those increased costs and a poor harvest, the third consecutive rise. Other sectors too are also seeing an increase in prices as we hit the summer months. Fuel prices aren’t falling as fast as they did last year, while clothing prices have also risen. Ultimately, consumers are going to be feeling the pinch once again when it comes to the cost of living.
“It appears that these pressures are also going to continue into the second half of the year, making any significant rate cuts from the Bank of England difficult to envisage. That said, with the labour market slowing and economic growth proving especially elusive in recent months, it might just have no choice but to bite the bullet and cut rates sooner rather than later.
“We also saw yesterday inflation in the US begin to accelerate, potentially as a result of the tariff uncertainty that has come to dominate markets of late. The UK’s ‘trade deal’ with the US appears to have been anything but that, and any renegotiation is likely to impact prices further. While the geopolitical risks have subsided for now, the economic ones continue to blight. The challenge to get inflation back down and staying at 2% is looking increasingly fraught with danger.”
Rob Clarry, Investment Strategist at Evelyn Partners, the UK wealth manager, comments:
“June’s inflation print came in above expectations across the board, with the big upward contribution coming from transport. Services inflation, which represents a better gauge of domestically generated inflation than headline CPI, remained at 4.7% year-on-year, beating consensus estimates for a 4.5% rise.
“The UK continues to face stickier inflationary pressures compared with other advanced economies. This is arguably reflected in the bond market with gilts yields remaining higher than their European counterparts, despite the UK facing a similarly weak growth profile.
“This print complicates the outlook for the Monetary Policy Committee (MPC), which meets on 7th August. Although traders continue to expect two further 25 basis point interest rate cuts this year.
“The pound extended gains against the dollar following the hot CPI report.”
Abhi Chatterjee, Chief Investment Strategist, Dynamic Planner said: “Sequels are meant to be insipid – a last-ditch effort to keep the franchise alive. Not so in the case of Inflation – its only come back bigger and stronger. June saw inflation (as measured by the CPI Index) rise to an 18-month high of 3.6%, compared to 3.4% in May. The largest upward contributor was transport, particularly motor fuels, partially being offset by the housing costs.
“Inflation in the UK has risen consistently during the year, making it challenging for the consumer on the back of rises in water bills, energy costs and council tax. the only silver lining, if one can call it that, is the Bank of England’s forecasts expect inflation to peak at 3.7% during the year before it begins to normalise – so theoretically, we are not far from the summit and its all downhill from there.
“This naturally confounds the Bank’s plans on interest rates. With growth in the economy so anaemic, there is increasing pressure from business and households alike to cut interest rates and create an environment conducive for growth – but the push and pull of the macroeconomy that is the UK makes it challenging for the Chancellor to promote a growth agenda and the Governor, who is mandated to keep the economy from overheating.”
It’s ‘disappointing’ says Michael Browne, Global Investment Strategist, Franklin Templeton Institute as he explains: “Today’s UK CPI Inflation numbers are disappointing, rising to 3.6%. The primary drivers are transport costs, which of course includes petrol but also a sharp increase in air fares, rising 7.9% month-on-month. This surge reflects the strong bookings airlines are seeing for holidays, and their pricing moving as a result. This may suggest the MPC should proceed with caution at the August meeting, where a rate cut is widely expected. However, there are some other striking data points to consider.
“Firstly, service sector inflation is flat, stuck at 4.7%. This is surprising given the rise in employment costs. Consumers are not prepared to pay higher prices which is not good for corporate margins or for jobs which is why we are seeing job vacancy numbers fall so sharply.
“Secondly, retail sales data from Barclaycard shows a retreat in June, after seeing a strong warm weather bounce in May. Notably, DIY purchases fell sharply after the boost in housing activity in April as buyers rushed to complete transactions before the end of “help to buy” schemes. This alongside Barrett’s the housebuilder, downgrading its sales forecast for 2025 due to challenges in obtaining planning permissions for new sites, suggest a weak second half for the housing market and related spending.
“Driving up house building is a crucial part of the Government’s growth strategy, but it’s clearly facing difficulties. The announcement by the Chancellor of larger mortgages for lower-income workers in the Leeds Reforms will at best only add 5% to the number of new buyers, which is still well below long-term averages as interest rates remain stuck because of inflation and deficit fears.
“All of this points to a potential slowdown in growth for the second half of the year, and the prospect of tax increases in the October budget will only add to the challenges. If these factors coincide with improved inflation data, as consumers continues to be parsimonious especially with services, then the narrative of ‘Bad News is Good News’ for rates at least, will be firmly in play.
“The market reaction to these numbers has been subdued, whilst Gilts have sold off across the curve, the move is just 3bps. Sterling, after a brief rally until 8am, carried on sliding and equities remained flat. But the latter masks some real weakness across the real estate, employment, and retail sectors: All interest rate sensitive, all in the firing line if there is not enough growth.”
Inflation adds to Bank of England’s conundrum according to Jeremy Batstone-Carr, European Strategist Raymond James Investment Services, as he comments:
“Today’s inflation data, for June, confirms that consumer prices are gently increasing, broadly in line with the Bank of England’s forecast, and are on pace to peak at or around 3.7% in September before easing thereafter, although the risk of a higher peak has increased after today’s release.
“The key takeaway from today’s data is the extent to which businesses are continuing to pass higher national insurance contributions and the increased minimum wage on to consumers, most evident in food prices which have increased for a third consecutive month to 4.5%.
“Elsewhere, the data confirms that the pace of fuel price disinflation eased last month, although this has been partially offset by a slight fall in hotel prices following an unusual spike in that category in May.
“In terms of underlying price pressures, strength in core goods prices has not been counterbalanced by a soft service sector, a development which may concern the Bank’s rate-setting Monetary Policy Committee as it weighs up a possible further interest rate cut on 7th August.
“On balance, today’s data have added to the Bank of England’s policy conundrum. While economic activity is slowing and employment conditions are softening, rising near-term price pressures suggest that a continuation of the cautious and gradual approach to rate-setting might be the most prudent course of action. A rate cut in August may now be in doubt.”
Zara Nokes, Global Market Analyst at J.P. Morgan Asset Management (JPMAM), comments:
“This morning’s data showed no signs of inflation relief in the UK just yet, with underlying price pressures still bubbling away. Unfortunately for the Bank of England, things will likely get worse before they get better, with inflation expected to push higher in the coming months owing in part to an increase in regulated prices. That said, with the labour market quite clearly cooling, the Bank should be able to reduce the restrictiveness of policy at its next meeting in August. Beyond this though, the Bank must exercise a degree of caution. While, in theory, mounting growth risks should take some of the heat out of price pressures, until this materialises in the hard data, the Bank must stay focused on appropriately tackling inflation.”
YOU Asset Management’s CEO Derrick Dunne comments on this morning’s inflation data:
“Stubborn inflation and stagnant growth are becoming an uncomfortable combination and today’s 3.6% CPI reading confirms the UK is drifting deeper into stagflation. While the uptick in inflation wasn’t entirely unexpected, there’s no doubt it’s another blow for households already under pressure and a headache for investors trying to preserve the real value of their money.
“Crucially, this leaves the Bank of England’s Monetary Policy Committee (MPC) with a difficult decision next month. Despite inflation rising, we still believe the MPC is more likely than not to cut rates in August to help breathe life into the UK’s struggling economy. One further cut after that could even see Bank Rate fall below 4% for the first time in over two and a half years.
“That would offer some much-needed relief to mortgage borrowers, though savers may feel the pinch as interest rates on cash accounts start to fall. On the flip side, lower rates could be positive news for investors in UK equities, which tend to benefit when monetary policy loosens.”
Richard Potts, Economist at Bondford, on the CPI announcement:
“Today’s higher-than-expected inflation release is likely to be a double-edged sword for the pound. The immediate market reaction has been positive, as this data is likely to keep the Bank of England on its ‘gradual and careful’ interest rate cut path. Only a couple of days ago Governor Bailey had suggested that a more rapid fall in rates could be warranted should increased slack emerge in the UK economy. These comments exacerbated pound losses instigated by last week’s lacklustre GDP release, though this unexpectedly high inflation reading seemingly rules out the prospect of an accelerated program of policy loosening for the time being.
“Yet stubbornly high inflation in excess of its rich-world peers, along with ever mounting debt concerns, suggest deep rooted problems in the UK economy that will be hard to turn around. This is undercutting the UK’s attractiveness to foreign investors and limiting any potential rebound in the pound.
“While the inflation figures were above expectations, they still may not be enough to deter the Bank of England from cutting rates on August 7. Particularly if tomorrow’s jobs report provides further evidence of emerging slack in the economy. The MPC may choose to look through these inflation figures, which are partially the result of government policy choices and exogenous energy shocks, and instead focus on lacklustre domestic drivers. Higher inflation risks are, however, likely to rule out the swifter program of rate cuts alluded to by the Bank’s governor. Price stability is, after all, the Bank’s primary policy directive.
“Beyond that, the next major test for the pound will be the US Fed’s July 30 rate announcement. A hawkish response to June’s rise in US inflation – which seemingly provided the first evidence of the ‘Trump tariff effect’ on prices – could prompt the dollar to gain at the expense of other currencies. The pound could be particularly vulnerable due to the UK’s deteriorating economic outlook.”
