The latest UK CPI data has been released this morning by the ONS revealing that headline inflation has now dropped to 2% for the year to the end of June – finally hitting the Bank of England’s target rate. Good news for sure.
But all eyes are now focused on what it means for the Bank of England’s MPC ahead of their next meeting on 1st August. With many hoping for a cut in interest rates then, today’s data has put a fly in the ointment. And, as usual, it’s the print for core – or service – inflation – stubbornly stuck at 5.7% yet again this month which is causing concerns. But will it delay the expected cut to UK interest rates so desperately needed by consumers, businesses and borrowers in the fight against the cost of living crisis? What might this mean for wealth managers and their asset allocation decisions? What about markets? And gilts?
Experts from across the Wealth Management sector have been sharing their reaction to today’s inflation data, telling us what they think it means for the UK economy, for markets and investment decisions as follows:
Richard Carter, head of fixed interest research at Quilter Cheviot comments: “In what are the new Labour government’s first set of figures, everyone on the front benches will be breathing a sigh of relief that inflation has stuck rigidly to the 2% target. With two consecutive months of at target inflation now reported, the Bank of England should now have enough room to enact its first rate cut in over four years. This will delight Chancellor Rachel Reeves and give a fresh impetus to the economic plan she unveiled last week.
“The good news is that pressures are easing, especially for consumers. Grocery inflation is now at its lowest level in almost three years, and the economic picture is improving. We have also had events come and go last month, specifically Taylor Swift’s UK leg of her world tour, that will have added some volatility to the overall inflation figure for June. With these stripped out of future figures, it is hoped that even if we do get another uptick in inflation in the coming months, the BoE can shake it off quickly and prevent any reassessment of the optimal ceiling for interest rates, and any chance of rates having to be put back up.
“What happens with core and services inflation will be crucial to watch and will give an indication of just how quickly the Bank of England can act when it comes to normalising monetary policy. Both readings remain much more elevated than the BoE would like and are proving stubborn to bring back down to that 2% level, even if the overall measure of CPI has come down sufficiently. It is these two readings that will prevent the BoE from fully releasing the handbrake and allow the economy to pick up speed.
“As such, any interest rate cut that is delivered in August will likely be the first of a gradual path down to ensure mistakes of the 1970s are not repeated and inflation is allowed to take root once again.”
Rob Morgan, Chief Investment Analyst at Charles Stanley Direct, said:
“Inflation remains stable, balancing around the Bank of England’s 2% target as higher interest rates successfully exert a dampening effect on prices.
“But it’s not time to pop the Champagne corks just yet. There are two sides to the inflation story. While goods inflation, including food, has come under control, core CPI (excluding energy, food, alcohol and tobacco) looks set to remain higher, indicating lingering pressures. While the worst of the post-Covid inflation burst is behind us, a strong jobs market, buoyant wage growth, mildly improved British growth, and lingering supply chain issues may push prices up in the months to come. All eyes will be on Thursday’s data on wages, the key input into service inflation, before a decision can be made about a rate cut next month.
“Almost half of British DIY investors are not confident that inflation will remain on track, but the vast majority expect rate cuts to follow regardless. Many will be balancing both their portfolios and their household budgets accordingly, increasing their exposure to equities to ensure their investment outpace cash returns, ensuring they’re on the best mortgage rates, and chasing the best cash savings rates.”
Tom Stevenson, investment director at Fidelity International, said:
“A second consecutive month of headline inflation at target makes a cut in interest rates on 1 August more likely but not yet a shoo-in. The key questions for the Bank of England rate setters remain persistently high service sector inflation and wage growth.
“It is a sign of how far we have come in the fight with inflation that today’s repeat 2.0% reading elicited a shrug. It is only 20 months ago that the UK was an inflation outlier with prices rising at 11.1%. But policy makers are more concerned with the pace of price rises in the service sector, which accounts for 80% of the UK economy, and which remained unchanged at 5.7%. Core inflation, excluding energy and food, was also flat at 3.5%.
“Tomorrow the focus will be on the employment data, which is forecast to show only a modest decline in basic wage growth from 6% to 5.7%. Wages are a key component of service sector inflation.
“The decision on whether to cut interest rates from a 16-year high of 5.25% next month remains on a knife edge.”
Jeremy Batstone-Carr, European Strategist, Raymond James Investment Services said: “Today’s inflation data confirms that price pressures remain extremely subdued, holding at the Bank of England’s desired 2.0% for a second successive month – a milestone that has not been achieved since July 2021.
“However, rate-setters will be concerned about persistent price increases across the service sector, which have proved hard to shift despite high interest rates. The Bank of England will need to assess the extent to which numbers have been temporarily inflated by Taylor Swift’s UK tour, which coincided with this data collection. Prices of everything from concert tickets and hotels to restaurant prices could have been impacted to a certain degree, and without the “Swift Effect” price pressures could possibly have eased further. But, it is unlikely that the Monetary Policy Committee (MPC) will want to take that chance when deliberating the base rate in two weeks’ time.
“It appears that a first Bank of England rate cut is being kicked into the long grass, as Chief Economist Huw Pill has backed recent commentary from hawkish MPC members Jonathan Haskel and Catherine Mann. With only two Committee members so far voting in favour of a first rate cut, it is probable that households and businesses will have to wait a few more months for the much-desired rate cut.”
Andrew Summers, Chief Investment Officer at Omnis Investments, comments on today’s UK Inflation rate decision announcement:
“No smoking gun for an August move. Following speeches from the MPC’s Haskell and Pill last week, the odds of a move from the BoE in August reduced somewhat. This dataset is unlikely to turn that around, with the market continuing to focus on the meeting after, in September which is pretty much priced for a 25bps cut. It occurs after the US FOMC meets and is priced to deliver their first cut. Investors appear to believe that the BoE will want to wait until their US counterparts move first and it’ll take more than today’s data to change that. The 50bps of cuts priced in the UK by the end of this year is probably fair at this juncture but we believe the risks are skewed to more being delivered.”
Tom Hopkins, Senior Portfolio Manager at BRI Wealth Management, said:
“UK inflation held steady at the Bank of England’s target of 2% in June the same as in May and holding at 2021-lows. The latest figures showed hotel prices rose strongly, while second-hand car costs fell but by less than the same time last year. It was the last such release before the Monetary Policy Committee’s August 1 rates announcement. The MPC is due to decide whether to cut interest rates from their current 5.25 per cent. You could see the MPC delay the first rate cut until September.”
Nathaniel Casey, Investment Strategist at wealth manager Evelyn Partners, said:
“Despite headline inflation remaining in line with the Bank of England’s inflation target for a second consecutive month, June’s inflation data came in slightly warmer than forecasters had been expected, with a particularly sticky reading for services inflation which stayed at 5.7%.
“Even as headline inflation remains within target for its second consecutive month, the continued strength in services inflation will likely remain a cause for concern for committee members at the BoE, heading into their next meeting which concludes with an MPC rate decision on 1 August.
“However, it remains to be seen if this will be alarming enough to delay their first rate cut later into the year. Currently markets are only pricing in a 35% chance of a cut in August, while prior to this inflation print that number stood at around 50%.
“Within today’s data, the category for clothing and footwear was responsible for nearly half of this month’s deceleration in the annual rate, with prices falling by 1.2% for the month of June, moderating the annual rate to just 1.6%. Similarly, the basket for food and non-alcoholic beverages continued to ease, decelerating to 1.5% on an annual basis.
“This has helped drive the overall basket for goods firmly into deflationary territory with prices in this segment contracting by 1.4% over the last 12 months.
“Meanwhile, it’s the services sectors of the economy which are still running hot, with an annual inflation rate of 5.7%. Within this, restaurants/hotels posted the strongest monthly print, with prices rising 0.9% compared to the month prior. As has been seen in previous locations during her tour, there is speculation that Taylor Swift’s ‘Eras tour’ that gripped the UK during June could be responsible for driving up hotel prices during the month.“
sabel Albarran, Investment Officer at Close Brothers Asset Management, said:
“As expected, today’s headline CPI inflation figure remains at 2% for June. This will be welcome news for MPC members, who will be thinking seriously about cuts and with inflation now at target, we expect to see a 25bps cut in September.
“However, economic growth has been more resilient than expected and this is troubling some members of the committee. Added to this is the fact that base effects are likely to push inflation higher over coming months, rather than being a persistent downward force, as has been the case in recent months. Nonetheless, the Bank has made it clear that there is scope for cuts without making policy accommodative.
“The political landscape is less likely to be troubling the Bank of England. The new Labour government is expected to launch a budget in the Autumn, but fiscal room is limited and revenue raisers will be necessary to plug the gap in the Spending Review. This is unlikely to be inflationary.
“In the meantime, the August Monetary Policy Report will provide new forecasts and a key insight into the Bank’s thinking ahead of September. We continue to monitor our checklist: a change in guidance, a change in the votes, and CPI below 2% at the end of the forecast.”
Daniele Antonucci, Chief Investment Officer at Quintet Private Bank (parent of Brown Shipley), said:
“Today’s UK inflation print is likely to cement market expectations that the Bank of England will begin its rate cutting cycle in August. For the second time running, inflation is at the 2% percent target, coming in just a touch above the consensus.
“The important thing, though, is that the process of inflation convergence now looks more entrenched, which should give the central bank some extra comfort that the time to start lowering rates is nearing.
“After next month’s cut, we expect an extra rate reduction later in the year, and three more in 2025. In general, we believe the Bank would want to proceed at a moderate pace, especially when the Fed hasn’t started to reduce rates just yet. This is to avoid unwarranted sterling weakness, which could raise import price inflation.”
Chris Arcari, Head of Capital Markets, Hymans Robertson, said:
“While UK headline CPI remains close to the Bank of England’s 2% target, this largely reflects declines in energy prices and their interaction with the Ofgem energy price cap. Core CPI (which strips out volatile components such as energy and food prices), has also eased, but at 3.5% year-on-year highlights some persistence in underlying inflation. This is further illustrated by services CPI, which though slowing, remains at 5.7% year-on-year.
“Furthermore, in addition to much better than expected growth and activity data, UK business surveys highlight wage increases, shipping costs and rising raw materials prices contributing to rising costs. This suggests services inflation is likely to remain sticky, while goods price disinflation has largely run its course. Indeed, headline inflation is actually forecast to start rising again, and reach 2.8% year-on-year by the end of the year.
“Nonetheless, lowering rates doesn’t necessarily mean the Bank of England is adopting a stimulative stance. Given recent falls in inflation, monetary policy has continued to tighten through 2024 despite base rate being held constant, via rising real rates. This despite the last rate rise coming in August last year. Put another way, still-elevated, but easing, underlying inflation pressures can be consistent with a gradual reduction in interest rates to slightly less restrictive levels.
“In light of recent positive growth data and signs of sticky underlying inflation pressures, markets have pushed back expectations for the first rate cut to the September MPC meeting. Markets now more or less fully expect two 0.25% pa rate cuts by the end of the year. Whether the BoE cuts rates in August or September, we think that the key point is that the pace of rate cuts is likely to be very gradual given the current decent growth backdrop and stickiness in underlying measures of inflation.”
Luke Bartholomew, Deputy Chief Economist, abrdn, said:
“Today’s inflation report will keep the Bank of England’s August rate decision on a knife edge. The strength of hotel price growth is suggestive of a so-called Taylor Swift effect on prices, but policy makers will almost certainly look through this kind of dynamic.
“More fundamentally, the ongoing stickiness of services inflation will leave the Bank wondering how long inflation will stay at the 2% target once favourable base effects have passed and domestic price pressures start to drive headline inflation again.
“Tomorrow’s wage data will provide more clues about these price pressures, and the Bank will hope to see a further moderation in wage growth. For now, we continue to expect a rate cut in August, but this will require the upcoming data to cooperate.”
Zara Nokes, Global Market Analyst at J.P. Morgan Asset Management (JPMAM), said:
“Despite the progress made on inflation over the past 12 months, there will be a sense of déjà vu at the Bank of England following today’s latest print. Headline inflation remained at target in June but the critical component – services inflation – significantly overshot the Bank’s latest projection, coming in at 5.7% year on year.
“This inflation print, coupled with ongoing resilience in economic activity – as evidenced by the stronger-than-expected 0.4% month on month GDP print in May – is likely stronger than the data the Bank is looking for to start cutting rates.
“At its previous meeting in June, the Bank indicated that the decision on whether to cut rates is ‘finely balanced’. Absent a sharp deterioration in the activity data, in our view today’s data should close the door on an August rate cut.”
Daniela Sabin Hathorn, senior market analyst at Capital.com, said:
“The bullish run in GBP/USD remains solid as official data released on Wednesday morning confirmed UK inflation remained unchanged at 2% in June. The release was actually a little stronger than anticipated as markets had hoped CPI would have dropped further to 1.9%, which would have been the lowest level since April 2021. Core inflation, which excludes volatile prices like food and energy, was also unchanged in June at 3.5%, despite analyst forecasts of a drop to 3.4%.
“The big question now is whether this data allows the Bank of England to cut rates in August. Current pricing in markets is leaning towards no rate cut after the data release, with a 64% chance of ‘no change’. Services inflation, which has remained sticky despite the disinflation process, is likely one of the main reasons keeping the central bank from cutting rates.
“On Thursday morning we’ll get the latest employment data from the UK, which includes wage data from May. Whilst the data is slightly outdated it can give markets a great sense of direction on where the BoE may be heading with its policy over the coming months.
“So far, growth in wages has been resilient which has put upward pressure on inflation, so increased focus has been placed on the data in recent months. In April, average earnings excluding bonuses remained unchanged at 6%, as did the figure that includes bonuses at 5.9% despite market hopes for a drop to 5.7%. Forecasts show analysts expect this data to have softened slightly in May, which could give traders a little more hope for a rate cut in August.
“For now, the path of least resistance in GBP/USD remains higher. The pair has managed to break the 1.30 mark for the first time in a year, which consolidates the bullish momentum further. Both Monday and Tuesday saw attempted pullbacks from sellers but the fact the direction was unchanged suggests there is still ample buying interest to continue moving higher.
“Despite the RSI being in overbought territory, there is still room to go before it reaches the peak set back in July last year, which was the last time the pair was trading above 1.30. the next target for buyers could be 1.3040 before focusing on moving higher towards the 1.31 mark, at which point resistance may start to become more evident.“
