UK PMIs 'Silver lining' after recent stagflationary data

Data out of the UK last week carried a distinct stagflationary whiff. Inflation surprised to the upside, in particular the more stable core subindex. Services inflation remains stuck near 5%. Unemployment ticked up, and the number of payrolled employees fell for the fifth consecutive month, albeit the enormous drop of the month prior was revised upwards.

This contrasting news puts the Bank of England in an extremely tough spot. While we still expect the MPC to lower rates again at the August meeting, the recent uptrend in UK inflation means that the bank is likely to strike a cautious note that indicates further cuts will remain very gradual.

The downbeat data of the last few weeks is reflected in the slow grind downward of sterling against the euro, while it keeps holding up well against the dollar. The silver lining for the UK is that the PMIs have been performing better than the lagging real data so far. This week’s release therefore takes on high importance.