UK inflation holds at 2.0% – Services inflation remains stubborn

According to the Office for National Statistics (ONS), inflation data released this morning revealed that, on a year-on-year basis, we were unchanged across headline, core and services numbers. This sent sterling (GBP) northbound versus G10 peers, with GBP/USD recently clocking highs just shy of $1.3000.

UK inflation at +2.0%

UK CPI (Consumer Price Index) inflation held steady at the Bank of England’s (BoE) inflation target, rising +2.0% in the twelve months to June, matching May’s release and defying economists’ estimates of +1.9%. CPI inflation also came in as expected between May and June, rising +0.1% from +0.3%.

Behind the headline numbers, the most significant upward influence was almost entirely from restaurants and hotels, rising +6.3% in June on a year-on-year basis, up from May’s reading of +5.8%. The clothing and footwear category observed the largest downward contribution over the same period, slowing to a rise of 1.6% in June from +3.0% in May.

Core inflation, a measure that strips out energy, food, alcohol, and tobacco, was unchanged at +3.5% in the twelve months to June and matched market estimates. Month on month, core inflation eased from +0.5% in May to +0.2% in June and also matched market estimates.

Sticky services inflation

In the service sector, prices remain stubborn and could throw a spanner in the works for a rate cut on 1 August despite inflation being at the BoE’s target rate (the BoE has held the Bank Rate at a 16-year high of 5.25% for seven consecutive meetings). Year on year, services inflation rose +5.7% in June, equalling May’s release and was slightly higher than the +5.6% markets anticipated. This is also higher than the BoE’s latest forecast of +5.1%.

Given that the BoE is most focussed on services inflation at this point and considering this will be the last inflation report before the rate decision in August, swaps traders pared back forecasts of a rate cut for next month’s meeting. The OIS market (Overnight Index Swaps) indicates a 30% probability of a rate cut, down from 40% before the data release.

Traders will also consider recent comments from BoE officials, such as Jonathan Haskel, an external Monetary Policy Committee (MPC) member, and the BoE’s Chief Economist Huw Pill – in particular, Pill noted ‘uncomfortable strength’ in annual services price inflation and wage growth.

Therefore, tomorrow’s UK employment and wages data, released at 6:00 am GMT, will be a key watch for the BoE and traders.