Potentially a big turning point in the UK inflation story. After what seemed to be endless upside surprises in UK inflation – which was generally perceived as having a bit of a ‘problem’ – today’s inflation print actually came in lower than the vast majority of economist predicted (7.9% v 8.2% expected).
Most components came in lower than expected, so the figure was not driven by any one-offs. For next month’s print we are expecting another decent fall again to around 7%, as energy prices will take a big month-on-month fall given the Ofgem price cap change. It takes a long time for the inflation narrative to change but we may be at the start of it; the lagged effects of previous falls in commodity prices and input prices will start to feed through at the same time as the large base effects of food and energy also start to bring down the headline rate. On the flip side are the high wages in the UK, running around 7% which we know is currently too high for the Bank of England’s liking. However, there are signs of loosening in the labour market, and with growth stalling around 0% and the fall in inflation to come, it is difficult to see this moving higher at least.
For the immediate policy implications of this release, no doubt expectations for the Bank rate will need to be moved lower. There was talk of 50bps or even what was needed for a 75bps move at the next meeting. It is now much more likely a 25bp move will happen on 3 August, taking Bank Rate to 5.25%. Beyond that it really will be data dependent.
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