How fast is UK inflation falling?

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How fast is UK inflation falling?

Investors are expecting UK inflation to have slowed when figures for June are published on Wednesday — the question is how quickly.

Expectations for UK policy rates ramped up sharply last month following unexpectedly strong wage numbers and stubbornly high consumer price inflation data, as markets priced substantially higher interest rates to bring down inflation to the Bank of England target of 2 per cent.

The June numbers will be watched also by the government, as Prime Minister Rishi Sunak has made it one of his five goals to halve inflation over the course of this year.

Economists polled by Reuters forecast that UK inflation slowed to 8.2 per cent in June, down from 8.7 per cent in the previous month. That would still be above the Bank of England forecast of a decline to 7.9 per cent.

Sandra Horsfield, economist at Investec, expects a sharper decline to 8.1 per cent, driven by lower petrol and, to a lesser extent, food price inflation. However, she forecasts core inflation, which strips out the more volatile food and energy prices, to be unchanged at 7.1 per cent.

“As concerns primarily centre on the sticky nature of core inflation, merely seeing lower headline inflation would not deter additional tightening,” said Horsfield. She expects that the Bank of England will increase rates by another half percentage point to 5.5 per cent in August following the same increase in May. “Indeed, we doubt the MPC will be confident enough to pause raising rates in September either,” she added.

Markets are pricing that the Bank of England will increase interest rates to 6 per cent by the end of the year. To reverse some of the recent surge in interest rate expectations that pushed up mortgage rates, “data will have to show clear signs that disinflation is accelerating”, said Horsfield. Valentina Romei 

Will the euro keep rising against the dollar? 

The euro hit a 16-month high against the dollar this week as traders ramped up their bets that the Federal Reserve will stop raising interest rates ahead of the European Central Bank.

The euro has risen by more than 2.9 per cent against the greenback since the start of July to trade at $1.1233, its highest level since March 2022, boosted by US inflation slowing faster than expected to 3 per cent for the year to June. 

The outlook for inflation in the eurozone looks more difficult, with consumer prices in Germany rising 6.8 per cent for the year to June, higher than economists had forecast. Traders still fully price in two more 0.25 percentage point rate rises for the ECB, but have removed bets that the Fed will move beyond a widely anticipated rate rise in July.

“The euro had no difficulty at all taking out its spring high against the dollar this week,” said Jane Foley, head of FX strategy at Rabobank. “But what’s interesting now is that you’ve seen members of the ECB Governing Council talking about weakening economic data, in contrast to sentiments from [ECB president Christine] Lagarde last week,” she said. 

The eurozone has already entered a technical recession, with output across the bloc shrinking by 0.1 per cent in each of the past two quarters, and German house prices falling at a record rate this year and manufacturing struggling with weaker demand from China.

“It could be that once we get to September the market may realise that the eurozone has growth issues of its own, interest rates have peaked and suddenly the euro doesn’t look very attractive any more,” Foley said. Mary McDougall

What will retail sales tell us about the health of the US consumer? 

Retail sales data for June to be released on Tuesday will offer insight into the health of the US consumer as the labour market begins to slow. 

Economists polled by Reuters forecast that the Census Bureau will report a 0.4 per cent increase in overall retail sales in June from the previous month, following an increase of 0.3 per cent in May. Excluding the autos sector, retail sales for June are expected to have risen 0.3 per cent. 

Bank of America analysts believe that last month’s figures will be lower than the estimate, however, in part because the bank — which has a large retail presence in the US — has seen a decline in its own credit and debit card spending. The analysts cite a 0.2 per cent decline in card spending in June, consistent with the recent slowdown in the labour market. Bank of America therefore expects the Census Bureau data to show a 0.2 per cent decline in retail sales ex-autos for June, and a 0.1 per cent drop in the core control group. 

The US reported last week that hiring had slowed in June after months of unexpected strength. That slowdown — which is nevertheless still modest — could put some pressure on spending, and comes amid expectations of a recession, tight financial conditions and slowing inflation, all of which crimp spending. Kate Duguid