UK Inflation Ticked Up in July, as Expected: Fed Eyes Rate Cut

The UK's preferred measure of inflation edged up in July, according to figures released by the Office for National Statistics (ONS). The Personal Consumption Expenditure (PCE) price index, a key indicator closely watched by the Bank of England (BoE), rose by 0.2% on the month, in line with market expectations. This brought the annual rate of inflation to 2.5%, also matching analysts' forecasts.

The ONS reported that excluding volatile food and energy prices, core PCE inflation also increased by 0.2% for the month, but rose by 2.6% year-on-year. This was slightly lower than the predicted 2.7% increase.

BoE officials often focus on core PCE as a more reliable gauge of underlying inflation trends. Both headline and core inflation remained unchanged from June on a 12-month basis.

However, the report highlighted a continued stubbornness in housing costs, which rose by 0.4% in July. This was despite easing inflation in other areas, with core prices excluding housing increasing by just 0.1% for the month.

The ONS also reported that personal income rose by 0.3% in July, exceeding the expected 0.2% increase. Consumer spending meanwhile climbed by 0.5%, in line with forecasts. This robust spending growth occurred despite a fall in the personal savings rate to 2.9%, the lowest level since June 2022.

Analysing price changes, the ONS noted that goods prices fell by less than 0.1% in July, while services prices rose by 0.2%. On an annual basis, goods prices were down by less than 0.1%, while services prices surged by 3.7%. Food prices increased by 1.4%, and energy prices accelerated by 1.9%.

Financial markets reacted minimally to the inflation data, with equity futures indicating a slightly higher open on the London Stock Exchange and UK government bond yields edging higher.

Market sentiment currently points to a 100% likelihood of a rate cut by the BoE in September. The primary uncertainty lies in the magnitude of the cut, with investors debating between a quarter-point reduction (25 basis points) or a more aggressive half-point cut (50 basis points).

Following the release of the ONS data, market pricing shifted slightly in favour of a 25 basis point reduction, lowering the probability of a 50 basis point move to 30.5%, according to the CME Group's FedWatch gauge.

In recent pronouncements, BoE Governor Andrew Bailey has expressed confidence in the UK's progress towards its 2% inflation target.

The BoE is now expected to pivot its focus from solely controlling inflation to a more balanced approach that also supports the UK labour market. While the unemployment rate remains low at 4.3%, it has been trending upwards over the past year, and surveys indicate a slowdown in hiring and a perception amongst workers that jobs are becoming more difficult to secure.