The UK inflation report for June was hotter than expected and that continues to stir up stagflation risks for the UK economy. Let’s take a closer look at the details to see what exactly is going on in the background that’s creating this hot mess for the BOE.
The first thing that stands out is that food price inflation is seen rising for a third straight month and is outpacing the CPIH reading again. Food price inflation was at 4.5% in June, its highest since February last year, while CPIH only recorded a 4.1% reading last month.
That is definitely a bit of a worry for the BOE. Policymakers have acknowledged that there is evidence to support the notion that households are now placing more emphasis on things like the price of their weekly supermarket expenditure, petrol prices, and energy bills when thinking about how high inflation is.
So, the recent trend we’re seeing with food price inflation isn’t going to be all too encouraging. Food prices in the European region in general are also rising but the one we’re seeing in the UK looks to be standing out. So, this is certainly one spot the BOE has to keep an eye out for now besides their usual focus on services inflation.
Speaking of that, services inflation was flat at 4.7%, compared to estimates of a decline to 4.5% in June. That comes despite the index date having a cutoff on 10 June. There were concerns that the ONS could have used 17 June as the index date, which could have exacerbated prices on the services side.
In any case, this still remains a sticky spot but relative to the trend we’re seeing with food price inflation, it is at least something the BOE can still argue that is gradually “getting better”.
But now with food prices being on the up, the BOE is really having to deal with one worry to another basically.
In the bigger picture, softer labour market data will likely help to keep the BOE on track with rate cuts. However, it’s going to be a very slow drive towards neutral rather than a straightforward series of rate cuts for the central bank. That especially with stagflation risks continuing to haunt policymakers for the time being.
As things stand, another rate cut in August looks probable. But we’ll have to see how the labour market data tomorrow reaffirms those odds, which likely it will.
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