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.
