Inflation expected to rise above 2% in first increase this year
Good morning, and welcome to our rolling coverage of business, the financial markets and the world economy.
We’re about to learn whether the UK’s cost of living squeeze intensified last month.
Inflation data, due at 7am, is expected to show that prices rose faster than the Bank of England’s 2% target.
City economists predict the CPI inflation rate will rise to 2.3% per year in July, from 2% in May and June, partly pushed up by fast-rising prices for air fares, package holidays and hotels.
That would be the first increase in UK inflation this year – a blow to policymakers’ efforts to keep inflation sustainably down to target.
Rob Wood, chief economist at City firm Pantheon, explains how hotels could push up inflation:
“The price of a one-night hotel stay has been very strong this year, partly reflecting a new seasonal pattern since Covid… as well hotels likely charging a form of surge (demand-based) pricing.
“The ONS surveys only about 100 hotels, which means outliers, such as a Welsh hotel price in June boosted by demand from a Pink concert, can distort the figures.
Energy bills could also have an upward impact on inflation. There was a smaller decline in household energy prices in July compared with the same month a year ago, when prices fell sharply.
Data yesterday morning showed that grocery price inflation has risen for the first time since March last year, as supermarkets nudged prices higher.
A rise in inflation could make the Bank of England less willing to consider a second cut in UK interest rates, having lowered Bank Rate from 5.25% to 5% earlier this month.
Their counterparts in New Zealand, incidentally, have just announced their first rate cut in four years.
Earlier today, the Monetary Policy Committee agreed to reduce the Official Cash Rate by 25 basis points to 5.25%. The pace of further easing will depend on the Committee’s confidence that pricing behaviour remains consistent with a low inflation environment, and that inflation… pic.twitter.com/DbnUvJTVm5
— Reserve Bank of NZ (@ReserveBankofNZ) August 14, 2024
Earlier this week, BoE policymaker Catherine Mann warned it was too early to think the battle to calm inflation is over.
The money markets currently predict the BoE will leave UK interest rates on hold in September, but probably cut again in November – let’s see if today’s data changes that view….
The agenda
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7am BST: UK inflation report for July
-
9.30am BST: UK house price inflation and rental costs
-
10am BST: Eurozone Q2 GDP report (second estimate)
-
1.30pm BST: US inflation report for July
-
3.30pm BST: EIA crude oil inventory data
Key events
A rise in inflation to 2.3% shouldn’t create ‘panic stations’ at the Bank of England, argues Steve Matthews, investment director, liquidity at Canada Life Asset Management.
Wage data continues to fall and unemployment remains above recent lows.
The Monetary Policy Committee (MPC) have indicated that they fully expect bumps in the road along the way and, although this data will be a cause for wariness, it shouldn’t deter them from cutting borrowing costs in the near future.
There are hopes that UK core inflation (stripping out food and energy costs) could have dipped in July.
Julien Lafargue, chief market strategist at Barclays Private Bank, says:
“On a year-on-year basis, we expect UK headline inflation to have increased in July driven by the sharp decrease in energy prices a year ago.
Encouragingly, core prices should have moved in the opposite direction with a slight moderation in July, driven by a modest improvement in services inflation.”
“Overall, the path of slow and gradual disinflation remains intact, in our view. As a result, we continue to expect the Bank of England to wait before cutting interest rates again, with a move potentially in November rather than in September.”
Revealed: how UK’s poor paid price of ‘cheapflation’ in cost of living crisis
Larry Elliott
Ahead of the inflation data at 7am, a new report has shown how poorer families have been hit by ‘cheapflation’ in the cost of living crisis.
Britain’s poorest households saw the bill for their weekly shop rise by far more than that of the rich during the height of the cost of living crisis as the sharpest price increases fell on cheaper brands, research reveals.
The study by the Institute for Fiscal Studies (IFS) found the least well-off had been hardest hit by “cheapflation” in the 2021-23 period – paying 29.1% more for their food, compared with 23.5% for better off households.
The report – which lays bare the disproportionate impact of rising food prices on the poor – has been released to coincide with the latest cost of living figures from the Office for National Statistics (ONS) coming out on Wednesday, which are forecast to show the first increase in the headline annual inflation rate since December last year.
The IFS said grocery items that were among the cheapest 10% in each spending category, including staples such as milk, pasta and butter, rose by 36% over the two years to last September, while more expensive versions of the same items rose by just 16%.
Inflation expected to rise above 2% in first increase this year
Good morning, and welcome to our rolling coverage of business, the financial markets and the world economy.
We’re about to learn whether the UK’s cost of living squeeze intensified last month.
Inflation data, due at 7am, is expected to show that prices rose faster than the Bank of England’s 2% target.
City economists predict the CPI inflation rate will rise to 2.3% per year in July, from 2% in May and June, partly pushed up by fast-rising prices for air fares, package holidays and hotels.
That would be the first increase in UK inflation this year – a blow to policymakers’ efforts to keep inflation sustainably down to target.
Rob Wood, chief economist at City firm Pantheon, explains how hotels could push up inflation:
“The price of a one-night hotel stay has been very strong this year, partly reflecting a new seasonal pattern since Covid… as well hotels likely charging a form of surge (demand-based) pricing.
“The ONS surveys only about 100 hotels, which means outliers, such as a Welsh hotel price in June boosted by demand from a Pink concert, can distort the figures.
Energy bills could also have an upward impact on inflation. There was a smaller decline in household energy prices in July compared with the same month a year ago, when prices fell sharply.
Data yesterday morning showed that grocery price inflation has risen for the first time since March last year, as supermarkets nudged prices higher.
A rise in inflation could make the Bank of England less willing to consider a second cut in UK interest rates, having lowered Bank Rate from 5.25% to 5% earlier this month.
Their counterparts in New Zealand, incidentally, have just announced their first rate cut in four years.
Earlier today, the Monetary Policy Committee agreed to reduce the Official Cash Rate by 25 basis points to 5.25%. The pace of further easing will depend on the Committee’s confidence that pricing behaviour remains consistent with a low inflation environment, and that inflation… pic.twitter.com/DbnUvJTVm5
— Reserve Bank of NZ (@ReserveBankofNZ) August 14, 2024
Earlier this week, BoE policymaker Catherine Mann warned it was too early to think the battle to calm inflation is over.
The money markets currently predict the BoE will leave UK interest rates on hold in September, but probably cut again in November – let’s see if today’s data changes that view….
The agenda
-
7am BST: UK inflation report for July
-
9.30am BST: UK house price inflation and rental costs
-
10am BST: Eurozone Q2 GDP report (second estimate)
-
1.30pm BST: US inflation report for July
-
3.30pm BST: EIA crude oil inventory data
