Energy prices were the main driver of hospitality price rises over winter

Food and core goods inflation should start to come lower

Away from services, the news is a bit brighter and headline inflation should dip back noticeably in Wednesday's figures. Last June we saw a near-10% spike in petrol/diesel prices; this year, they fell by 2.6% across the month by our estimates. That alone shaves 0.4pp off the annual CPI rate, and the result is that inflation is likely to hit 8.1% (down from 8.7%). Expect an even more pronounced decline in July’s numbers, as the 17% fall in average household electricity/gas bills wipes almost another full percentage point off the annual rate of inflation.

The news on food prices should start to get better too. While still at a lofty 18%, food inflation does appear to have peaked and we've seen more noticeable early signs of slowing in the equivalent eurozone data. Given the UK's food inflation rate mirrored the eurozone until a few months ago, we don't see why this downward trend shouldn't also be replicated in Britain.

That's because producer prices have been rising much less aggressively over recent months, and on a seasonally-adjusted basis, the change in prices over the past three months is compatible with what we typically saw before pre-2022 (see chart below). We doubt the divergence between producer and consumer prices will persist for much longer

Producer price inflation for food has slowed dramatically

Finally, we’ll also be watching ‘core goods inflation’ after various categories showed unexpected strength over recent months. April saw a surprise spike in vehicle prices, and we’ve also seen stickiness in clothing as well as alcohol/tobacco. The chart below shows that durable goods inflation has picked up again, despite inventory levels rising relative to sales among retailers/wholesalers.

This isn’t unique to the UK, and we saw something similar in the US earlier this year. But we don’t expect this divergence between leading indicators and core goods inflation to continue. Base effects should also help disinflation among goods categories too over the next few months. We think this should help core inflation nudge fractionally lower in Wednesday’s data.

Durable goods inflation has picked up despite higher inventories/lower sales

Implications for the Bank of England

Throw all of that together, and the result is that headline CPI should end up a tad below 7% in July (released in August). And a further downshift in energy inflation in October should take us to around 5% on our current projections. Core inflation will be stickier, ending the year north of 5%, and services is likely to be closer to 6%.

If we’re right, then the Bank of England can probably get away with hiking slightly less than markets expect. Investors currently expect a peak for Bank Rate at 6.15%. Progress on services inflation should be enough to convince the committee to pause its hiking cycle in November, which would suggest a peak rate of either 5.50% or 5.75%. But given the tendency of inflation data to come in on the high side, we certainly shouldn't rule out a peak of 6% should services CPI fail to slow.