Upside UK inflation surprise keeps pressure on BoE
CPI inflation in the UK surprised to the upside in June. Headline inflation rose to 9.4% y/y (consensus: 9.3%) from 9.1% in May, with core inflation easing slightly to 5.8% from 5.9%. The upside surprise in headline inflation was driven by energy and food prices, while the decline in core inflation was on the back of some cooling in the goods category due to declines in used car prices. Services inflation actually continued to strengthen – in part due to the rolling back of tax cuts supporting the hospitality sector, but also likely reflecting wage pressures coming from the tight labour market.
Inflation is likely to continue rising in the UK over the coming months, likely reaching a peak when Ofgem raises its energy price cap in October – at which point we expect inflation to approach 11%. Given the continued upward pressure on prices, we are making another upgrade to our forecasts, chiefly for 2023. We now expect inflation to average 8.9% in 2022, up from 8.8% previously, and 6.5% in 2023, up from 6.1%. All told, continued firmness in inflation and persistent tightness in the labour market are likely to maintain pressure on the Bank of England to raise rates aggressively, despite the elevated risk of recession. Our base case is for the MPC to raise Bank Rate by 50bp to 1.75% in August, followed by 25bp hikes in subsequent meetings, with the policy rate peaking at 2.5% by December. See for more.
