United Kingdom: Upside risks building for inflation – Deutsche Bank

FXStreet Insights Team FXStreet

Deutsche Bank’s Chief United Kingdom (UK) Economist Sanjay Raja notes that UK inflation data for July broadly matched expectations, with headline Consumer Price Index (CPI) rising and core CPI steady. He highlights energy price increases from the Ofgem Price Cap and base effects as drivers, while food and services inflation eased. Raja nonetheless sees further upside in CPI later this year and warns of persistent risks for the MPC.

Inflation outlook and MPC stance

"UK inflation broadly met expectations today. Headline CPI rose to 2.9% y/y (June: 2.6%). Core CPI stayed put at 2.6% y/y. Services CPI slowed to 3.4% y/y (June: 3.6%)."

"What happened in July? Energy prices – as expected – rose on the back of the hefty rise in the Ofgem Price Cap. Elsewhere, base effects played their role in pushing inflation a little higher."

"There was some good news though. Food price inflation dropped to its lowest rate since late 2021. Services CPI also fell to its lowest rate in three months. Core goods pricing remains constrained, with summer discounting continuing. And promotional activity continues to keep prices competitive."

"Looking ahead, some further upside to inflation looks likely. Energy prices look poised to rise further. Services inflation, we think, will also edge up. We continue to see CPI peaking near 3% y/y later this year. Risks are skewed to the upside."

"For the MPC, there will be some food for thought, however. The Bank’s suite of core services measures all ticked up – highlighting some uneasiness in price momentum. Energy inflation also remains volatile with tensions in the Middle East ongoing. Further rises in the Ofgem Price Cap can’t be ruled out."

"For now, combined with yesterday’s labour market report, the MPC can remain on the sidelines. But don’t expect any change in sentiment. Uncertainty around the outlook remains. And we expect the MPC to remain cautious for the time being."

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

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FXStreet Insights Team

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