UK: inflation data to determine size of August rate hike
Whether the Bank of England hikes by another 50 basis points in August, or is content with a smaller 25bp move, will almost entirely hinge on next week’s inflation data. June’s meeting made it clear that the Bank is laser-focused on the CPI and wage numbers, and not a lot else. Next week, we should see headline CPI dip noticeably, though this is largely because last June’s near-10% surge in fuel prices won’t be matched – and in fact, petrol/diesel pump prices were down by 2.6% last month. Food inflation should also decline modestly too, not least because producer price inflation has been easing for several months now. Core inflation should inch slightly lower too, though it’s the services component that matters most to the Bank of England, and we expect this to stay at 7.4% - a post-Covid high. This is also the Bank of England’s expectation, according to the June meeting minutes.
Assuming we’re right on services inflation, August’s meeting then becomes an extremely close call. The latest pay data came in hot but was balanced out by some better news on the supply of workers. A further rise in services CPI would probably cement another 50bp move, and a downside surprise would probably nudge the dial in favour of a 25bp move.
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