United Kingdom: Inflation risks tilt higher – TD Securities

TD Securities’ Julie Ioffe expects UK headline CPI to rise to 2.9% year-on-year in July, largely due to the Ofgem energy price cap adjustment. Services inflation is forecast to ease to 3.4%, while core goods rise to 1.0%, keeping core CPI at 2.6%. The bank highlights upside risks from food, airfares and core goods that could challenge the recent disinflation trend.

Ofgem-driven rise and upside risks

"We expect headline inflation to move up to 2.9% y/y in July (mkt: 2.9%, BoE: 2.8%, prior: 2.6%), explained largely by the Ofgem price cap adjustment in the energy component. Stripping out energy, we expect services inflation to temporarily dip to 3.4% y/y (mkt: 3.3%; BoE: 3.4%; prior: 3.6%), but core goods inflation picking up to 1.0% y/y (BoE: 1.0%) should largely offset this effect, leaving the core inflation number steady at 2.6% y/y (mkt: 2.5%)."

"The inflation outlook over the coming months may prove less benign than recent data (energy aside) suggests. Food prices are vulnerable to a pickup as fertiliser costs and adverse weather conditions feed through to production costs. Airfare inflation could also re-accelerate with airlines already suggesting that they will seek to recover higher fuel expenses through post-summer ticket prices."

"Meanwhile, core goods inflation is showing signs of turning higher, with electronics price increases and renewed supply chain pressures reducing the scope for discounting. These risk factors suggest downside progress in some inflation components could become increasingly difficult to sustain in late 2026."

"Beyond that, concerns shift to whether wages respond to the slightly higher path for headline inflation. There, we see less of an obvious impact given the loosening of the labour market and reduced bargaining power of the worker. Should these remain at bay, the BoE is more likely to remain on a prolonged hold at its already-restrictive level of Bank Rate, rather than elect to hike further."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)