UK Inflation: What to Expect from June’s Data

In
a
note
published
the
day
before
the
election
result,

ratings
agency
Morningstar
DBRS
added
a
note
of
caution
to
the
prevailing
political
excitement.

“In
our
view,
the
Labour’s
economic
plan
seems
ambitious
and
is
subject
to
execution
risks,
and
even
if
fully
implemented,
the
results
will
take
time
to
materialise.

“We
see
execution
risks
in
Labour’s
plans,
largely
because
of
the
scale
of
the
investment
needed.
Moreover,
poor
effectiveness
of
the
plans
could
lead
to
lower-than-expected
growth,
with
adverse
implications
for
the
fiscal
outlook.”

Before
the
election,
UK
GDP
saw
0.9%
growth
in
May,
beating
the
forecasts
for
growth
of
0.5%.
And
this
better-than-expected
UK
economic
growth,
coupled
with
the
new
government,
provided
support
for
the
pound
in
July.
Sterling
has
gone
from
€1.15
at
the
start
of
2024
to
€1.19
and
from
$1.27
to
$1.30
in
the
same
period.

Will
a
Stronger
Pound
Help
Inflation?

Stronger
currencies
tend
to
weaken
the
impact
of
inflation
of
countries
that
are
heavily
dependent
on
imports,
like
the
UK.
Imports
become
cheaper
and
exports
become
less
attractive
to
trading
partners
in
other
currencies.

Currency
weakness
since
the
Brexit
vote
in
2016
has
been
an
additional
factor
in
exacerbating
the
high
inflation
era
in
the
UK,
some
economists
have
argued;
Bank
of
England
governor
Andrew
Bailey,
in
May’s
press
conference,
said
that
the
UK
has
been
subject
to
global
factors
such
as
high
energy
and
food
costs,
but
has
its
own
inflation
dynamics
which
affect
and
enhance
price
changes.
Inflation
peaked
at
11.1%
in
October
2022
in
the
UK,
higher
than
the
peak
levels
seen
in
the
eurozone
and
US.

While
a
stronger
pound
may
weigh
on
inflation,
higher
economic
growth
can
be
inflationary.
This
effect
is
probably
in
the
very
early
stages,
as
growth
is
starting
from
a
very
low
base
–
GDP
registered
no
change
in
the
first
quarter
of
2024,
although
this
was
subsequently
revised
upwards.
In
economic
theory,
a
stronger
economy
drives
inflationary
activity
as
consumers
compete
for
goods
and
services,
driving
up
prices
like
flights,
cars
and
houses.

In
terms
of
the
finer
details
of
Wednesday’s
data,
the
focus
will
remain
on
core
CPI.
This
measure,
which
excludes
more
volatile
energy
and
food
prices,
fell
to
3.5%
in
May
and
is
expected
to
come
in
at
3.4%
in
June.

Policymakers
are
more
concerned
about
core
CPI
because
it’s
falling
more
slowly
than
the
headline
rate
of
inflation
and
is
also

higher
than
that
measure. Services
inflation
is
also
a
worry
for
the
Bank,
because
its
still
running
above
5%.

When
Will
the
Bank
of
England
Cut
Interest
Rates?

The
Bank
itself
has
“skipped”
July
in
its
calendar
of
monetary
policy
meetings
and
meets
again
on
August
1.

Financial
markets
are
predicting
the
first
rate
cut
of
the
cycle
on
that
date,
which
would
be
a
year
since
the
Bank
last
hiked
rates,
to
5.25%.

Has
the
new
government
altered
that
rate-curring
timetable?
Perhaps,
some
economists
say.

In
a
note,
Kathleen
Brooks,
research
director
at
XTB,
says
that
the
Bank
could
raise
inflation
targets
in
August.

“There
is
a
decent
case
for
the
BOE
to
wait
until
we
get
the
new
government’s
first
budget
before
cutting
interest
rates.”

Chris
Forgan,
portfolio
manager
at
Fidelity,
argues
that
the
Bank,
after
all
the
talk,
may
just
get
on
with
it.

“Services
inflation
is
still
higher
than
the
Bank
of
England
would
like,
but
we
believe
it
will
begin
its
rate
cutting
cycle
before
long,
which
should
further
stimulate
economic
activity.”  

If
the
Bank
doesn’t
cut
in
August,
attention
would
then
move
to
the
September
19,
November
7
and
December
19.
Labour’s
first
budget
could
happen
between
mid-September
and
the
end
of
October.
Still,
last
year
the
Conservative
party
announced
its
autumn
statement
on
November
22,
2023.

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