UK July 2024 Sticky Inflation Up to 2.2% pa

The Office for National Statistics (ONS) has this morning released inflation figures for the UK for July 2024.

After falls over the last few months and then holding last month, UK Consumer Prices (CPI) Index increased by 0.2% to 2.2% pa.  The biggest contributors to increased inflation were housing and household services where prices of gas and electricity fell by less than they did last year given increased demand due to a poor start to summer also reflected in the fact that the largest downward contributors i.e. prices falling came from restaurants and hotels, where prices of hotels fell this year having risen last year again due to a poor start to summer.

The increase was lower than expected and stock markets will no doubt react positively to the news.  Transport, alcohol and tobacco are still ‘big hitters’ for higher inflation, all climbing again in the month of July and still up for the year, with alcohol and tobacco still at 7.3% pa.  Furniture and household goods as well as housing and household services had the biggest falls in the month of July as we expect this trend to continue as interest rates fall and the rate of rental increases slows down.

RPI Increases to 3.6% pa

The old measure of inflation RPI, an arithmetical mean of the average prices of a basket of household spending (rather than the geometric mean for CPI) and still our preferred measure of real inflation, increased dramatically by 0.7% to 3.6% pa (2.9% pa in June) destroying more than half of the falls in March, April and May.  On a happier note, RPI is still more than 4 times lower that it was in October 2022 (14.2%pa).

Comment

We forecast last month that strong jobs data in the US and the UK, as well as a bumper July for pubs and hospitality with England’s path to the Euros final, may push inflation back up again rather than down and they have.  That said, we also forecast both the Federal Reserve and the Bank of England to hold interest rates.  The Federal Reserve did hold but the Bank of England cuts rates by 0.25% to 5.0%pa.

All eyes now to the US with the Bureau of Labor Statistics also due to release its CPI inflation figures later today.  If inflation holds or increases, we do not see interest rates being cut, if inflation softens, markets will rally on an expectation of a rate cut on 18^th September with the Bank of England decision then due on 19^th September.

French and German inflation is still higher than the UK, so we do not expect another rate cut by the European Central Bank or the Bank of England until October.  US rate cuts will clearly depend upon today’s US CPI rate and if down, then bets may be back on for a September rate cut but if not, then we also look ahead to Autumn for Federal Reserve action.