UK inflation Preview: Rising inflation adds a reason why the Bank of England will hike rates in August

• The headline inflation in the UK is expected to have accelerated to 2.6% over the year in June while core inflation is expected to rise 2.2% y/y.
• With post-Brexit Sterling’s depreciation being fully priced-in the UK inflation, the period of Sterling’s appreciation from March 2017 till April 2018 is not yet fed in while fuel prices are more likely to affect rising inflation.
• The inflation data are set to confirm the path of the policy rates rising as early as this August timing the rate hike to August Inflation Report release.

The headline inflation in the UK is expected to accelerate to 2.6% y/y in June after decelerating to 2.5% in May after the period of decelerating inflation from 3.1% y/y in November last year, the Office for National Statistics is to report on Wednesday, July 19 at 8:30 GMT.

While the headline inflation is most likely be affected by the rising oil prices, the core inflation stripping the consumer basket off prices of food and energy is also expected to pick up to 2.2% y/y in June.

Even with the inflation rate accelerating due to external factors like oil prices, the Bank of England is set to interpret the increase of the core inflation as a more fundamental driver. The reason is that the UK labor market slack is being fully absorbed, the unemployment rate is at the lowest level since 1975 and the wages are rising 2.5% over the year when bonuses are included while increasing 2.7% after bonus payments are excluded, the lasted labor market report showed on Tuesday.

We know since June meeting of the Bank of England Monetary Policy Committee (MPC) that the policymakers are more hawkish after the Bank of England chief economist Andy Haldane joined the camp of voters in favor of the rate hike together with outgoing external member Ian McCafferty and another external Committee member Michael Sauders.

“Most indicators of pay growth have picked up over the past year and the labor market remains tight, suggesting that domestic cost pressures will continue to firm gradually, as expected,” the Bank of England MPC meeting minutes said on June 21.

While the Bank of England’s MPC members repeatedly echoed that even in case of the Bank rate hike, further moves in the tightening the monetary policy will be only gradual and limited.

With the economic growth picking up after the first-quarter adverse weather-related slowdown, the stage is set for another monetary policy normalization in August with the UK inflation reading for June set to complement the mosaic.

The decade of UK inflation