UK Inflation Eased in June but Remains Far from the Central Bank’s Target
UK Inflation Moderation
Inflation in the UK decelerated in June as today data showed, coming in softer than expected, after repeated upside surprises. Headline CPI cooled substantially to 7.9% y/y, from 8.7% prior, in the smallest increase in over a year. Core CPI that excludes food, energy, alcohol and tobacco prices eased to 6.9%, following May's thirty-one year highs (7.1%)
However, inflation is still far from the central bank's 2% target and high wages don't help its efforts to bring it down, also creating risk for a wage-price spiral. According to last week's data, total pay (including bonuses) grew by 6.9%, in the biggest increase in nearly two years. Regular pay (excluding bonuses) stayed at 7.3% and the highest levels outside the pandemic period.
Wage growth been a constant headache for policymakers and Governor Bailey has issued repeated warnings recently. Earlier in the month he said that "both price and wage increases at current rates are not consistent with the inflation target". [1]
Back in June, the Bank of England was forced to reaccelerate the pace of tightening [2], due to high inflation and strong labor market. Today's data will likely be welcomed by officials, but they are still challenging and it will be hard for them to back down.
On the other hand, the BoE has already delivered 490 basis points worth of hikes since the October 2021 lift-off and risks triggering a borrowing crisis in its effort to mitigate the cost of living crisis. In its Q2 report, it noted that households and businesses are pressured from "higher borrowing costs". It also estimated that a typical mortgagor would see the interest rates payment increase by £220 over the the second half of the year, when rolling over a fixed-rate deal. [3]
The Pound rose to 2023 highs last week against the greenback, due to market optimism around a less aggressive Fed and continued tightening by the Bank of England. GBP/USD reacted lower and UK100 higher to today's soft CPI report, as it may allow policymakers to become less aggressive, but the data still call for more monetary restriction.
Nikos Tzabouras
Senior Financial Editorial Writer
Nikos Tzabouras is a graduate of the Department of International & European Economic Studies at the Athens University of Economics and Business. He has a long time presence at FXCM, as he joined the company in 2011. He has served from multiple positions, but specializes in financial market analysis and commentary.
With his educational background in international relations, he emphasizes not only on Technical Analysis but also in Fundamental Analysis and Geopolitics – which have been having increasing impact on financial markets. He has longtime experience in market analysis and as a host of educational trading courses via online and in-person sessions and conferences.
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