As wealth managers digest the latest UK inflation data released this morning from the ONS, showing CPI at 2.2% for the year to the end of July, compared to 2% last month, the data clearly have implications for the Bank of England’s MPC. With their next decision coming up in September, and economists expecting that inflation might remain above 2% target for some months, the smart money now seems to be on November for a further cut to UK interest rates.
Commenting on today’s inflation data, Richard Carter, head of fixed interest research at Quilter Cheviot said: “Today’s inflation data is a reminder for the Bank of England of the difficult task it has on its hands as inflation has risen again above the 2% target to 2.2% in July. One data point will not cause panic to spread, and much of this rise was expected due to favourable comparisons falling out of the figures. The good news is that these figures are slightly better than the market anticipated, which the BoE will be very pleased to see.
“It continues to be things such as energy costs that are driving inflation as this now begins to fall less than last year. It is such elements of this data, however, that will keep any interest rate cuts tempered for now, with the BoE opting for a gradual decline in rates to avoid inflation taking root once more and spiralling. Indeed, the BoE was insistent in its rate cut earlier this month that monetary policy will have to remain restrictive in order to keep inflation subdued at more palatable levels.
“The problem the BoE has is that services inflation remains elevated at 5.2%, and with wage growth remaining well above the headline rate of inflation, there are many risks out there should the BoE move too quickly in cutting rates. Indeed, core CPI stands at 3.3% now, although it is falling gradually. As such, we would expect November to be the earliest date for the next rate cut, unless we see a significant deterioration of the economy in the meantime. Inflation is a difficult thing to predict and does not simply rise or fall in a linear fashion, making it tough to manage. For now, the BoE will be content with where inflation is heading, but any further, unexpected rises, will start to ring alarm bells just as consumers and businesses crave further rate cuts.”
George Lagarias, Chief Economist at Forvis Mazars comments: “Inflation ticking up will probably not discourage the central bank from further rate cuts. Despite the uptick, all key measures, headline, producer prices and services inflation rose less than anticipated by markets.
“The global economy is evidently slowing, which means that price pressures should continue to subside. Having said that, even at a reduced pace, services inflation is still too high for comfort. The billion-Pound question for policymakers is: can China maintain lower export process for goods long enough for Western services inflation to come down closer to its long-term averages?”
Inflation rises in July, but rate cuts are still on the table says Jeremy Batstone-Carr, European Strategist, Raymond James Investment Services as he comments: “After falling to the Bank of England’s target in June, today’s data reveals that inflation has crept up above the 2% target once again. However, the cause of the rise is mechanistic and as such, the Bank will not be overly concerned about today’s figures.
“This rise in inflation can be attributed to the impact of Ofgem’s utility price adjustment last month, which was smaller than in July 2023. However, the deceleration in food, fuel and service prices has kept inflationary pressures relatively in check at 2.2%.
“Though overall price pressures remain higher than the Bank’s comfort level, the general direction of travel is still trending downwards, an encouraging sign for the Bank’s rate-setters.
“The next inflation update is scheduled for September 18th, one day before the Monetary Policy Committee’s decision on interest rates. Financial markets consider consecutive rate cuts unlikely, but this cannot be completely ruled out should these trends persist.”
Aaron Hussein, global market strategist at J.P. Morgan Asset Management comments : ‘Today’s inflation print will reassure members of the committee that voted for a rate cut last month that they may finally be taming the inflation beast. While headline inflation ticked up as favourable base effects fade, services inflation – a crucial measure of domestically generated inflationary pressure – moderated. This coupled with moderating wage growth, suggests that inflation may finally be heading in the right direction.’
‘However, with economic growth on a cyclical upswing since the start of the and the labour market remaining resilient, their remains a risk that cutting too quickly will fan the inflation flames. We therefore think it’s unlikely that the Bank will follow up its August cut with a cut in September. Absent any material shock to growth, this cutting cycle is likely to be gradual with a quarterly cadence most likely. Investors banking on imminent rate cuts will therefore be disappointed.’
Luke Bartholomew, Deputy Chief Economist at abrdn, said:
“Despite the pick-up in headline inflation, this report represents welcome news for the Bank of England. The move back above the 2% target was always likely given energy base effects, and in fact the rise was slightly smaller than expected. More importantly, measures of underlying inflation pressure look to be softening, with services inflation in particular coming in well below expectations. This should help reassure some policymakers that inflation pressures are proving slightly less persistent than feared. After yesterday’s solid labour market report, the Bank will not be in any hurry to cut rates again immediately, but the ongoing slowing in inflation pressure means there is certainly scope for at least one more rate cut this year.”
